Last week, the Bureau of Labor Statistics reported that the unemployment rate declined in June to the pre-recession level of 6.1%. According to the report, 288,000 jobs were added in the month. Over the last 12 months the economy has succeeded in creating around 2.5 million jobs – an average of more than 200,000 jobs per month.
The Silver Linings
The long-term unemployment number, i.e., those who have remained unemployed for more than 27 weeks, also declined. The number has declined 293,000 in June and about 1.2 million over the past 12 months. As long-term unemployed represents just 32.8% of the total unemployment, this is something to cheer.
The other crucial fact is that though low-wage new jobs were the main contributor, the high-paid ones also surged in June. The combination eventually helped the unemployment figure to decline. High-paid jobs were mainly generated by the auto manufacturing sector and finance.
Unemployment & Inflation
In an ideal world, demand has an inverse relationship with unemployment rate. As unemployment rate declines, demand increases in an economy. Hence it can be stated that if this positive trend of creating jobs sustains itself, the demand should boost the economy.
With higher demand, inflation also elevates. The recent trend of improving employment numbers could help the Fed in achieving the targeted rate of inflation. But in order to get the optimum effect of the level of unemployment on inflation, the growth of average wage should also increase, which currently lags inflation.
High Wage Jobs in Automotive
As mentioned earlier, the autos sector is one that contributed in creating high-wage jobs in the economy in June. It added almost 12,000 new jobs. This may be an indication that the sector is witnessing higher demand. Subsequently, the sector should grow at an impressive rate in near future, if there are no new challenges to deal with.
Positive Auto Sales
This rise in demand can be evident from the June auto sales number. Auto sales in June on a seasonally adjusted annualized rate (SAAR) basis increased to 17 million from the year-ago level of 15.9 million units. This is the first month since Jul 2006 in which SAAR reached 17 million. In the first half of 2014, U.S. light-vehicle sales improved 4% year over year to 8.17 million units. (Read: Monthly and 6-Month U.S. Auto Sales Up in June)
The Auto industry has current year and long-term EPS growth estimates of 13.6% and 13.5%, respectively.
3 Auto Parts Stocks to Buy Now
Here are the three auto parts stocks that are poised to cash in on the positive industry sentiment:
BorgWarner Inc. (BWA) is a supplier of engineered automotive systems and powertrain products for the world's major automakers. This Zacks Rank #2 (Buy) company sells equipment to original equipment manufacturers (OEMs) of light vehicles, commercial vehicles and off-highway vehicles.
The current year and long-term EPS growth estimates for this company are 15% and 17.2%, respectively, higher than the industry’s ESP growth estimates. The Zacks Consensus Estimate for the current year has revised 0.6% up over the last two months. It is expected to report second quarter results on Jul 24.
Delphi Automotive PLC (DLPH) is a manufacturer of vehicle parts and provider of electrical and electronic, powertrain, safety and thermal technology solutions to its automobile clients, all over the globe. It currently holds.
This Zacks Rank #2 company has strong EPS growth estimates of 15.0% and 14.6% for the current year and long-term, respectively. The company is expected to report its second quarter results on Jul 30.
Magna International Inc. (MGA) is a producer and developer of automotive systems and components of cars and light trucks. These include exterior systems, closure systems, body and chassis systems and electric vehicles/systems.
The current year and long-term EPS growth estimates for this Zacks Rank #2 company stand at 15.0% and 11.6%, respectively. The Zacks Consensus Estimate for the current year has revised 0.2% up over the last two months.
Bottom Line
The positive trend that the industry exhibited in the first half is expected to continue in the second half as well. With the improvement in the general economic situation, banks are offering lower interest rates and longer repayment periods for car loans which should boost auto sales. Further, the high average age of cars on the U.S. roads is resulting in high replacement demand for cars as well as car parts.
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