At the Federal Reserve, we follow closely the aggregate fluctuations in the U.S. economy, including the behavior of labor markets in general and the unemployment rate in particular. Our key policy instrument is the federal funds rate, which is used to influence all other interest rates, especially short-term rates, and thereby influence financial, labor, and goods markets to achieve our mandate of price stability and full employment.
Not surprisingly, some markets are more sensitive than others to both the cyclical behavior of the aggregate fluctuations and to monetary policy conducted by the Fed. Among those sensitive markets is the one for durable goods. The graph above illustrates this by showing total monthly sales of cars (thick blue line) from the late 1970s to today. Notice how volatile this series is, as spikes of high sales occur fairly often during the sample period. There’s also a clear pattern related to the unemployment rate (red line): Car sales plummet during periods of increasing unemployment, most notably during recessions (shaded bars).
But unemployment is far from the whole story. As the graph shows, car sales are also driven by two of the major costs of buying a car: the cost of gasoline (orange dashed line, right axis) and interest rates. The graph shows the bank prime loan rate (green line), which is used to set the interest rate charged for most car loans. Clearly, even when unemployment is low and declining, a rise in interest rates and the cost of gasoline is associated with a decline in car sales.
How this graph was created: First search for “total vehicle sales” and select the seasonally adjusted series. To highlight this series relative to the rest, select a solid line style with width 4. Next, use the “Add Data Series” option to search for and select “U.S. civilian unemployment rate”; again, select the seasonally adjusted series to keep the graph smoother. Next, add the series “bank prime loan rate” and “consumer price index for all urban consumers: gasoline.” To compare the time behavior of these series within the graph, place the y-axis for the last series on the right side. Finally, adjust the line colors and patterns to taste.
Suggested by Alexander Monge-Naranjo
View on FRED, series used in this post: