Abstract: We examine the ability of auto industry stock returns
to forecast quarterly changes in the growth rates of real GDP,
consumption, and investment. We find that auto stock returns are
superior to aggregate stock market returns in predicting growth rates
of GDP and various forms of consumption. The superior predictive
power of auto returns holds for both in-sample and out-of-sample
forecasts and has not declined over time. We then apply a finding in
this paper---that market returns have no explanatory power for future
output or consumption growth when auto returns are included in the
regression---to analyze the causal relation between the stock market
and investment. We use auto returns to proxy for forecasts of future
fundamentals, allowing market returns to capture the effect of the
stock market on investment. We find that aggregate returns forecast
equipment investment in the presence of auto returns, providing
empirical support for q-theory. Results for structures investment are
less convincing.
Keywords: Aggregate consumption, aggregate investment, auto industry, stock returns
Full paper (465 KB PDF)
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