Production trend in the US
Auto industry in the US has been undergoing a major turmoil due to adverse macro economic conditions. This resulted in an up and down of the auto production in the recent times. Historically auto industry has undergone series of upheaval in the production process wherein the production growth has shown tremendous fluctuating trends. Figure 1 demonstrates the auto production of the US from 1967 through 2007 (BEA, 2010).
Figure 1 shows that the overall production in the automobile industry in the US has been increasing since 1967, though there were intermittent fall or rise in the growth of production. The increase in total production of the auto industry shows that However, the growth of production, which measures the percentage change in total production over periods, has been fluctuating over the year. In addition, a trend line for the production growth demonstrates that the growth of production has been following a declining pattern.
There a declining trend in auto production growth is a concern as the industry is expected to face fall in production. The declining trend in production growth indicates a possible fall in future of the production growth in auto industry, which is a bad sign for investors in the industry.
Bureau of Labor Statistics
The cost of labor is one of the primary determinant factors for any production process. The labor cost index for automobile industry in the SU is shown in blue in figure 2 (BEA, 2010). A trend line for the labor cost index for next five years through 2012 demonstrates that the labor cost is expected to fall in the future. This is a positive indicator for the auto industry production, as a decline in labor cost would reduce the overall cost of production. For investors, a fall in the labor cost as shown in figure 3 is a good sign, as lower cost will lead to lower variable cost. This will eventually increase the margin and profit.
Capacity Utilization
Capacity utilization of the US automobile firms in percentage from 1987 to 2007 is plotted in figure 3 (BLS, 2010). Capacity utilization provides the per unit cost of producing the good. Therefore if the per unit cost of production is x, then in 2007, a capacity utilization of 70.9% would imply that till this the production can be done without increasing the average variable cost. Thus, a rise is capital utilization is desirable of organizations. In case of US auto industry, there is a fall in capital utilization over the years indicating that with increase in production, there is an increase in per unit variable cost. Therefore, there is a rise in overall variable cost of the industry.
Average and Marginal Productivity
The average productivity of labor (APL) is found to be following a flat trend, while the marginal productivity of labor (MPL) is declining. MPL for the US industry is declining indicating that with constant capital input, production will fall with increase in labor. Therefore, production in the industry can be increased by increasing capital i.e. better infrastructure, or technology or innovation. A declining marginal productivity also indicates that the production indicates that the industry productivity is falling, till some other measures are taken to revive it.
Implication for the Industry
In conclusion, the positive signs for investors for investing in the automotive sector are increasing trend in overall production of the US firms, indicating higher production in the future. A lower capital utilization and higher labor cost indicates that the overall cost of production is increasing in the automobile industry in the US. Investment in the industry should be done cautiously. Further, a fall in marginal productivity indicates that the industrial production is going to fall further, if capital is not increased. The production analysis shows that the industrial production of the auto sector in the US is declining and the productivity is also falling.
So without further changes in technological knowhow or capital investment, there will not by further growth. However, increase in capital through innovation in technology and increased capital investment, better machinery, and plants may again pull up productivity.
References
BEA. (2010). United States of America. Web.
BLS. (2010). Labor Productivity and Costs. Web.