Declining Volatility in the U.S. Automobile Industry

Abstract

This paper documents the dramatic changes in volatility that occurred in the U.S. auto industry in the early 1980s. Namely, output volatility declined significantly, the covariance of inventory investment and sales became much more negative, and adjustments to output, which in earlier decades stemmed primarily from plants hiring and laying off workers, were more often accomplished with changes in average hours per worker after the mid 1980s. Building on the work of Blanchard (1983), we show how all of these changes could have stemmed from one underlying factor—a decline in the persistence of motor vehicle sales. We use both industry-level data as well as micro data on production schedules from 103 assembly plants in the United States and Canada to document the developments in the early 1980s. We then use the original Holt, Modigliani, Muth and Simon (1960) linear quadratic inventory model to show how a decline in the persistence of sales leads to all of the changes noted above, including the propensity to use intensive margins of adjustment over extensive labor margins, even in the absence of technological change.