One of the most important debates in economic theory is how the US automobile industry will play into the US economy over the long term. One of the most prominent theories is what is called the Phillips Curve, after the British economists who developed it. The Phillips Curve shows the ups and downs of the US economy as a whole, and it looks at how the ups always outstripped the downs during a relatively strong economic period. For instance, when there are sharp increases in consumer price index (CPI) prices, consumers tend to spend more than they would have, and this leads to a boom in the economy. When the prices are cutback or balanced out, spending declines and the economy sinks into a recession. This is known in the economics field as the Great Recession.
There are several theories: that attempt to describe what causes these short-term fluctuations in the US economy. Two of the more prevalent views are that the consumer price index is controlled by supply and demand, and the other is that the Phillips Curve points to a situation where the supply is decreasing while the demand is increasing. If supply was decreasing, then the cost to make widgets would be lower, which would lead to an increase in the demand for widgets, and an equal increase in the number of people selling their widgets. In this case, of course, the economy would sink into recession. However, if the supply is increasing, then the cost to make widgets will go up, and this, ultimately, leads to an increase in the number of people selling their widgets.
Current theories about how the US automobile industry will perform point to the fact: that the market is becoming too dependent on the consumer price index. The increasing trend of cheaper gas prices, combined with the higher degree of competition among manufacturers, means that price levels are now within reach of many buyers. As a result, there are now fewer buyers, and there are now more sellers. This is resulting in lower inventory levels, less demand, and rising inventory costs.
This situation has been noted by numerous business cycles: over the past century, but none has resulted in the current situation that the US auto industry is in at the present time. Theoretically, the consumer price index should rise, but this has yet to happen, and it is widely believed that there is too much slack in the economy to allow for such an increase. More likely, the US automobile industry will only experience positive growth until the effects of the subprime crisis start to affect the industry in a major way.
There is also some concern: that the market may not be growing as rapidly as it should due to the dearth of brand names among major manufacturers. Some analysts believe that smaller companies have been forced to rely on imported products to gain a foothold in the market, despite the higher costs involved. The result is that consumers have started to buy products that are not necessarily of good quality, in order to keep costs down. In short, consumers have bought into the hype of these “cash for clunkers” schemes and have not learned that quality, low cost, and timely delivery are what matter most. These problems have led to increased frustration with the market, and this, in turn, has resulted in a drop in the industry’s share price.
To a certain extent, this depreciation has been good for the US economy: Automobile sales have always been a major contributor to the US economy, and falling fuel prices have helped maintain a level of economic activity. However, the impact of the subprime crisis has turned the consumer price index into a double-edged sword. It may have temporarily improved market conditions, but the damage to the credit market has already been done.
In light of this, it is unlikely that the current level of consumer spending will be supported by the increased availability of jobs.