By Michael McKee
Dec. 13 (Bloomberg) -- A bankruptcy filing by General Motors Corp. or Chrysler LLC might send the U.S. economy into chaos within weeks if it led to a shutdown at the companies.
Industry experts and economists say the automakers would close plants, fire tens of thousands of workers and cut production. That would cause many of their suppliers to collapse, triggering more job losses, straining the cities and states where the car and parts companies operate, as well as federal safety-net programs.
It would also deliver another psychological blow to consumers and a major shock to Main Street following the crises on Wall Street.
“The auto industry is a key element in the economy,” said Bob Schnorbus, chief economist at J.D. Power & Associates in Troy, Michigan. “Anything that disrupts it is going to slow the economy down more than we have already seen.”
Economists say it’s difficult to estimate the full impact, given the large number of possible scenarios. The outcome hinges on which companies filed for bankruptcy and when, and whether they would be able to continue building cars and trucks while in reorganization -- assuming they don’t go into liquidation.
“It would be unprecedented,” says Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut. “So it’s hard to say exactly what would happen.”
‘Cascade of Failures’
Still, a GM or Chrysler bankruptcy “would be the start of a cascade of failures,” says Dennis Virag, president of Automotive Consulting Group in Ann Arbor, Michigan. “The economy will be in chaos within weeks.”
The Bush administration said yesterday it will consider using money from the $700 billion bank-bailout fund to prevent GM and Chrysler from “collapsing.” On Dec. 11, the Senate rejected a short-term aid package for the two automakers.
The effect of a bankruptcy on growth would be significant, although economists say it won’t be as great as in decades past. Gross domestic product fell at a 4.2 percent annual pace in the fourth quarter of 1970 -- when, like today, the U.S. was in a recession -- following a 67-day nationwide strike against GM. Now, auto production accounts for only about 3 percent of GDP, Stanley says.
“It would obviously be a sizeable jolt to the economy,” he says. “But the sector is not as important as it was.”
Even so, statistics from the Center for Automotive Research in Ann Arbor show 239,000 people work in the U.S. for GM, Chrysler and Ford Motor Co. The center, which does research for the auto companies, estimates total job losses would reach 2.5 million if GM failed and 3.5 million if all three auto companies went out of business in 2009.
Retail, Manufacturing
That includes 1.4 million people in industries such as retailing that aren’t directly tied to manufacturing. Economists say each manufacturing job is responsible for an additional six outside the industry.
While many analysts say the Center for Automotive Research totals are exaggerated, the number of jobs eliminated would still be staggering.
“I don’t know that we’d lose all of those folks,” said Mark Zandi, chief economist at Moody’s Corp.’s Economy.com. “But over a million in the first quarter of ‘09, I think, would be reasonable to expect.”
The total would depend on whether Americans keep buying cars and trucks. While a Chapter 11 bankruptcy would allow the automakers to continue making vehicles while they restructure, GM, Ford and Chrysler have argued that deliveries would drop precipitously. Customers would baulk at buying anything from a company that might not be around to fix it, they say.
Plunging Sales
U.S. auto sales plunged 37 percent in November to a seasonally adjusted annual rate of 10.2 million -- the lowest level in 26 years, according to Autodata Corp. in Woodcliff Lake, New Jersey -- compared with 16.1 million a year earlier and 10.6 million in October.
Dealerships are already feeling the pinch. The National Automobile Dealers Association, a trade group based in McLean, Virginia, estimates that even without an automaker bankruptcy, 900 dealers will close this year and 1,100 next year, most of them GM, Ford and Chrysler franchises. The association says the three companies have more than 13,000 dealers nationwide, employing more than 700,000 workers.
The ripples of failure would also spread quickly to auto- parts makers. “There’s a fairly large number of suppliers out there very squeezed on cash right now,” says Jim Gillette, director of supplier analysis for CSM Worldwide, an automotive consulting firm in Northville, Michigan. “Vehicle volumes are so low, regardless of a bailout, that suppliers are still in trouble.”
Widespread Closures
Because many of these business work for all three companies, widespread closures would lead to production problems at Ford, even if it didn’t file for bankruptcy protection, officials at the No. 2 U.S. car company have said.
Parts makers including American Axle & Manufacturing Holdings Inc. and brake and powertrain-system makers ArvinMeritor Inc. and Hayes Lemmerz International Inc. employ 526,000 workers, according to U.S. Labor Department statistics, down more than 300,000 since 2000. Gillette predicts another fifth of them will lose their jobs in the coming year even if the automakers get bridge loans.
That will mean higher unemployment costs for states, which pay an average of $279 a week for benefits for 26 weeks, according to Jennifer Kaplan, a Labor Department economist. The payments can last as long as 39 weeks in some states, including Ohio, where GM has more than 11,000 employees, according to the company’s Web site. The jobless rate there was 7.2 percent in September.
Retiree Pensions
Hundreds of thousands of auto retirees who depend on the companies for pensions and health insurance would also be affected. Bankruptcy could throw them into federal government programs -- including the Pension Benefit Guaranty Corporation and Medicare -- just when rescue packages and government market actions are ballooning the federal budget.
The effect would be multiplied by an estimated decline in tax revenue for federal, state and local governments of $108.1 billion over three years if U.S. automakers’ operations were cut by 50 percent, the Center for Automotive Research says.
A collapse would quickly spread to financial markets, said Eric Selle, an automotive-credit analyst at JPMorgan Chase & Co. in a research report last month.
GM, Ford, Chrysler and their credit operations comprise 10 percent of the high-yield bond market, he said, and any failure would have major implications for credit-default swaps, asset- backed securities and commercial paper. It would be “the credit crisis, part II,” he said.
Less Concern
Federal Reserve Chairman Ben S. Bernanke signaled less concern about the potential impact for the bond market in a Dec. 5 letter to Senate Banking Committee Chairman Christopher Dodd. The automakers’ bonds “already trade at 20 to 40 percent of par value, suggesting that many of the losses that would be associated with a default have probably already been recognized,” he said.
Even if the automakers get loans to continue operations, the economy is going to take a hit. All three companies have promised to cut workers and close plants as a condition of receiving aid. And yesterday, General Motors said it will close 30 plants for at least part of the first quarter, cutting production by 250,000 vehicles. Honda Motor Co. said it will eliminate 119,000 vehicles from its North American production plan.
That means “suppliers are going to go under in the next few months, even if a bridge loan comes in,” Gillette says. “The only solution is to sell more cars.”
To contact the reporter on this story: Michael McKee in New York at mmckee@bloomberg.net
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