There is no doubt about the automotive industry's significance to the US economy. Car ownership has changed the economy and has long been a pillar of the American way of life, contributing to the employment of millions of people and being a significant driver of the manufacturing sector.
Recessions are notoriously challenging to forecast and harder to time. Therefore, there is a possibility. However, there is a good chance that the current auto industry's decline and that of its value chain will be the primary cause of the next global recession. The automobile industry is currently experiencing disruption on all fronts. The upper end, which is heavily concentrated in Germany (Europe's economic engine), is being disrupted by Tesla. The low end, which is primarily found in the US, Japan, and China, is being disrupted by ride-hailing and micro-mobility (important global economies). The current value chain of component suppliers, gasoline refining and supply, dealerships, and the ICE servicing business is being disrupted by the widespread use of electric vehicles (which are distributed).
Additionally, there is autonomy, which will also engage with it. Within the next three to four years, all of them are happening rather concurrently, leaving little time for the incumbents to respond. The majority of the lost employment won't be taken up by the disruptors either because they are more efficient and automated than the incumbents and operate in ageing and unproductive sectors. This thesis will be supported by many other events that occur at the same time.
To slow down rising inflation, the U.S. Federal Reserve (also known as the Fed) has announced plans to increase interest rates and eliminate other pandemic-era economic support measures. In March, the Fed raised its target interest rates by 25 basis points to reduce the 40-year high inflation rate (0.25 %). By year's end, the Fed said it will increase rates by at least another 150 basis points (1.5 %), bringing the rate to 1.75 % to 2.0 %. Consumer price inflation in the United States surged once more to hit 8.5 % less than a month after the Fed's March statement. Officials from the Federal Reserve have suggested that to hit previously defined goals, a more aggressive strategy may be needed.
The labour market appears to be a bright area for the American economy despite the industry's difficulties. Nearly as low as it was before the epidemic, the jobless rate was down to 3.6 %. Private and non-farm employment levels have gradually increased to levels that were similar to those before the outbreak. Since there are now approximately two vacant positions for every unemployed person and a ratio of 5 to 3 between job searchers and open positions, the number of unemployed people is at a 52-year low. There were fewer disruptions at assembly facilities in the first quarter of 2022, even though chip shortages and supply chain problems continue to be a problem for the automobile sector. The number of vehicles produced in North America increased to 1.35 million in March, the largest monthly output in a year, and employment in the country's auto industry surpassed that of 2019. However, employment in the manufacturing of motor vehicle parts is decreased, and the rebound is sluggish. Hourly pay for workers increased by 5.9 % in March, which is twice as quickly as it did before the outbreak. The first quarter saw a modest decline in weekly labour hours.
Following some preliminary investigation, it became apparent that the established auto sector would not be able to withstand the combined burden of modern mobility and vehicle electrification. The main reason for this is that the established players now underestimate the strength and pace of the impending disruption.
During the first three months of 2022, there has already been a year's worth of news and extra uncertainty, from the Omicron variant's abrupt rise to its equally abrupt drop, as well as a new European war and historic economic sanctions intended to restrain economic growth. The International Monetary Fund cut its approximations for global GDP growth by half a percentage point in January, a significant change that reflected the global economy's difficulties. They will once again be revised as the world moves in that direction.
Through Friday's close, an S&P index of aerospace and defence firms had lost 6.2 % of its value this year, as opposed to the S&P 500 index's 15 % decline. With an increase of 27%, Lockheed Martin, the biggest pure-play defence contractor in the U.S., led the group.
If not for Boeing Co., whose stock has been down almost 37% this year and hurt the sector as a whole, the comparison would be even stronger. As it battles with cost overruns on fixed-price defence contracts, a continuing halt to 787 Dreamliner deliveries, and the 737 Max jet's stalled recovery in China, Boeing's largest overseas market, the largest U.S. aircraft manufacturer has been depleting its financial reserves.
Even though Russia's violent invasion drove shares of numerous businesses to record highs, providing a cushion during the market's recent decline, defence executives have mainly downplayed the conflict's short-term financial effects. But despite all, the hostilities have sparked a wave of military backing for Ukraine that will brighten the prospects for sales for years. A total of 20 countries are supplying Ukraine with more weaponry that will eventually need to be replaced, and the United States and its allies have hinted that their expenditure plans could increase.
The Biden administration has provided Ukraine's armed forces with hardware valued at billions of dollars, including artillery, helicopters, drones, and Javelin missiles, a joint venture between Lockheed Martin and Raytheon Technologies Corp. President Biden signed a $40 billion package of further aid for Ukraine on May 21, which includes money for restocking American arsenals.
Global military spending is expected to reach an all-time high of $2.1 trillion in 2021, according to the Stockholm International Peace Research Institute. The defence sector was stable, showing slight growth in the US and large growth in Europe. Defence end markets were unscathed by the epidemic, in contrast to commercial aviation. However, supply chain problems that affected all industries and employee absence related to the pandemic still influenced the defence sector, which led to some production limitations. The Russian invasion of Ukraine in February 2022 sent shockwaves through the military community. The full ramifications of this event are still being felt, but they have already had an impact on spending and priorities for future defence expenditures worldwide.
Around 20% of the revenue for US contractors comes from exports of military equipment to other countries. Foreign military sales notifications for US defence manufacturers (indications of interest certified by the State Department and submitted by the DoD to Congress for approval) increased by three times in the first quarter of 2022 compared to the five-year historical average. The US defence aviation manufacturing industry can anticipate a rise in sales in 2023–2024 because roughly 70% of the anticipated exports are aircraft (both fixed and rotary).
Since their recent heights, commodities prices have fallen precipitously: crude is down 30%; aluminium is down 36%; copper is down 21%, and steel is down 19%. Soybean oil is at a 23-month low while crude palm oil is at a 1-year low. Crude prices will fall even further if the US experiences a slight recession. If the United States enters a recession, perhaps by the end of 2022, Citibank expects Brent crude to trade at roughly $60.
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