Content area
Full Text
CENTRAL BANKS in the U.S. and Germany place a high premium on understanding conditions in the automotive industry. In fact, in terms of influencing changes in economic activity, few sectors, except perhaps housing, are a primary driver of economic activity to a greater extent than autos. The cyclical tendencies of the sector make autos a key indicator for turning points in the economy and other short-term developments in national activity. For regional central banks, like the Federal Reserve Bank of Chicago and the Land Central Bank in Lower Saxony, the disproportionate concentration in their geographical areas of responsibility magnify the importance of the industry beyond that of the national impacts.
THE AUTO INDUSTRY AND THE BUSINESS CYCLE
One factor that directly contributes to the industry's disproportionate impact on economic activity is its cyclical nature. Detailed information on the automotive industry illustrates its disproportionate impact on regional and national economic activity. For example, the U.S. automotive sector directly contributes approximately 4 percent of total output as measured by gross domestic product (GDP). However, on a quarterly basis the sector can account for more than 40 percent of the change in GDP. The frequent changes in the industry affect many downstream industries and can influence national manufacturing, sometimes to an overwhelming extent. For example, in the U.S. during the 1993 summer slowdown, almost the entire weakness could be attributed to the sector.
In the case of the third quarter of that year, production and sales for the industry slumped, and the impact on the manufacturing sector and the overall economy was rather startling. The declines in shipments and industrial production of the motor vehicles and parts component of manufacturing were several times larger than the overall declines in manufacturing. Shipments of autos and parts were down 15.5 percent in July from the March peak -- over five times the decline in total manufacturing shipments. Even though the auto industry accounts for slightly less than 10 percent of total shipments, the industry's decline accounted (on a share-weighted basis) for half of the total decline in manufacturing shipments and for about 85 percent of the decline in durable goods manufacturing. In industrial production, the decline in the autos and parts component from April to July (-0.8 percent) was nearly...