ECON 230 Milestone 3 Ford

Milestone 3: Ford Motor Company

Timothy J Matelski

Regent University

Economics 230: Macroeconomics

Professor Bajah

24 April 2022

Introduction

Ford Motor Company operates primarily within the United States but does maintain an international presence. Outside of the US the two largest markets for Ford’s automobiles are China and Canada (Ford Revenue, 2022, Figure 1). However, these two markets combined only comprise approximately 27% of Ford’s sales, whereas sales within the United States make up 52.5% of Ford’s sales (Ford Revenue, 2022, Figure 1). Based on the sales data, the effect that the Federal Reserve has on the financial success of Ford is much higher than that of the Central Bank of the Republic of China or the Banque du Canada.

Federal Decisions Drive Lending

The Federal Reserve of the United States controls the money supply within the country. Because the Federal Reserve has this power, its decisions have a profound impact on the businesses that operate within the United States. One key mechanism that the Federal reserve utilizes to change the economic market at any given time is to increase the money supply, typically through purchasing government bonds. This changes the financial landscape of the US because it encourages “banks (to) make additional loans, the loans will in turn be used to buy goods and pay wages, and people will deposit some of these payments into other banks (Cowen & Tabarrok, 2020, p. 738).” As more money makes its way into the market, banks feel safer lending. This increase in lending can heavily alter Ford’s profits. For a company that deals in expensive goods that often require a customer to take out a loan, an increase in lending can coincide with an increase in sales. This impact occurs when the Federal Reserve decreases money supply as well. When banks feel as though lending poses greater risks, they simply lend less and increase the rate of reserve.

These theories become clearer when looking at the policies and decisions made by the Federal Reserve in the last three years. Between 2019 and 2021, the Federal Reserve has reported policies involving the interest rate and money supply. Specifically in the 2021 report given to the Senate in February the Federal Reserve stated the objective to “maintain(ed) the target range for the federal funds rate at 0 to ¼ (Federal Reserve, 2021, pp. 8)" This policy began in March of 2020 and demonstrates the Federal Reserve is attempting to boost the economy following the recession correlating to the Covid-19 pandemic. In 2021 they also reported a policy to “increase its holdings of Treasury securities by $80 billion per month (Federal Reserve, 2021, pp. 9).” Given this information, it is no surprise that Ford profited from the increase in money supply within the United States. From 2020 to 2021 Ford experienced a 7.2% increase in revenue (Ford, 2022, figure 1). In contrast to 2021’s policy, in 2019 the Chairman of the Federal Reserve mentioned a policy to, “shrink the size of our balance sheet by reducing our holdings of Treasury and agency securities (Powell, 2019, pp. 14).” Along with this decrease in money supply Ford experienced a 2.7% decrease in revenue from 2018 to 2019 (Ford Sales, 2022, figure 1). This demonstrates the effect the Federal Reserve can have on Ford’s profitability.

Minimal Foreign Impact

In stark contrast to the way the Federal Reserve's policies affect Ford, the policies conducted by the People’s Bank of China have insignificant effect. Over the last few years China has “the People’s Bank of China continued its policy of currency devaluation to boost its exports (Echarte Fernandez et al. 2021, p. 2).” This devaluation had a negligible effect on Ford as the profits increased. This may be due to the company’s limited sales in the international market. There is little research available on the policies of China’s central bank other than the simple fact that they are allowing the Yuan to become devalued to boost exports.

This minimal impact extends to the fiscal policies of Ford’s second and third largest markets, China and Canada respectively. With over 50% of Ford’s market existing within the United States, the other markets are overpowered by the decisions of the US government. That being said, both Canda and China have implemented important fiscal policies over the last 3 years. China has entered a trade war with the United States in recent years. “6 July 2018, the United States (U.S.) officially imposed 25 percent duties on $34 billion worth of imports from China. China immediately retaliated with tariffs on the same amount of U.S. exports to China (Chen et al, 2020, p. 1).” This policy has led to some decrease in GDP as both countries have restricted trade to previously involved partners. As this involves two of the primary markets for Ford, the cost of production logically increased, however not to a noticeable level. As previously stated, revenue did decrease from 2018 to 2019 and this may have been a factor, more likely however, is the decrease in money supply exacerbated this problem.

While China’s fiscal policies may have damaged Ford’s profitability, Canada’s recent fiscal policy has affected that country moreso than companies operating within it. As the Covid-19 pandemic has gone on for the majority of the last three years, most policy has been in response to the pandemic. Canada’s reaction to the economic downturn was to “enact(ed) fiscal policy support in the amount of around 15% of GDP (Azad et al. 2021, p. 2).” These policies helped to restart the Canadian economy, which allowed Ford to maintain a presence within the country. While this policy did not directly affect Ford, it kept the economy afloat, which indirectly gave Ford an opportunity to profit.

US Fiscal Policy

The majority of fiscal policy in the United States is the direct result of actions taken by the Federal Reserve. These actions have a profound effect on Ford as it relies on the lending of the banking system, which allows consumers to purchase high-cost goods such as Ford’s automobiles. Over the last three years the United States has been battling the Covid-19 pandemic and the economic disruptions that came with the virus. Throughout the last few years there have been several fiscal policies that have encouraged individuals to stay home. One such policy was the increase in unemployment benefits during the Covid-19 pandemic. The federal government “provide(d) an additional $600 per week funded by the federal government, this tripled weekly income for the typical unemployed worker (Moffitt & Ziliak, 2020, pp. 21).” The increase in unemployment benefits allowed a greater percentage of the available workforce to remain unemployed. The unemployment benefits were plenty to live off, but not enough to make large purchases such as a new automobile. Subsequently, this lowered Ford’s profitability as it decreased the number of people looking to buy a new car. This stimulus ended within the las year and took place during 2020 and 2021. Prior to the pandemic US fiscal policy focused on the trade war with China and free trade agreements, which have been previously discussed.

Conclusion

When looking at the effects of monetary decisions and fiscal policy, the decisions made by the United States have a much greater impact on Ford than any other country. This is primarily due to the percentage of sales that occur within the company's home country. Between changing the money supply and stimulating the economy, the actions the Federal Reserve and the national government take have a profound impact on Ford’s profitability.

References

Azad, N. F., Serletis, A., & Xu, L. (2021). Covid-19 and monetary–fiscal policy interactions in Canada. The Quarterly Review of Economics and Finance, 81, 376–384. https://doi.org/10.1016/j.qref.2021.06.009

Chen, A. W., Chen, J., & Dondeti, V. R. (2020). The US-China trade war: Dominance of trade or technology? Applied Economics Letters, 27(11), 904-909. https://doi.org/10.1080/13504851.2019.1646860

Echarte Fernández, M. Á., Náñez Alonso, S. L., Jorge-Vázquez, J., & Reier Forradellas, R. F. (2021). Central Banks’ Monetary Policy in the Face of the COVID-19 Economic Crisis: Monetary Stimulus and the Emergence of CBDCs. Sustainability, 13(8), 4242. MDPI AG. Retrieved from http://dx.doi.org/10.3390/su13084242

Federal Reserve. (2021). 2021 Monetary Policy Report. Board of Governors of the Federal Reserve System. Retrieved April 19, 2022, from https://www.federalreserve.gov/monetarypolicy/2021-02-mpr-summary.htm

Ford. (February 8, 2022). Ford Motor Company's vehicle wholesales in FY 2021, by major country (in 1,000 units) [Graph]. In Statista. Retrieved April 18, 2022, from https://www-statista-com.ezproxy.regent.edu/statistics/475637/vehicle-sales-of-ford-in-leading-countries/

Ford. (February 8, 2022). Ford's revenue from FY 2008 to FY 2021 (in billion U.S. dollars) [Graph]. In Statista. Retrieved April 18, 2022, from https://www-statista-com.ezproxy.regent.edu/statistics/267305/total-revenue-of-ford/

Moffitt, R. A., & Ziliak, J. P. (2020). Covid‐19 and the US Safety Net*. Fiscal Studies, 41(3), 515–548. https://doi.org/10.1111/1475-5890.12243

Powell, J. H. (2019, February). Testimony by chairman Powell on the Semiannual monetary policy report to the Congress. Board of Governors of the Federal Reserve System. Retrieved April 19, 2022, from https://www.federalreserve.gov/newsevents/testimony/powell20190226a.htm