Once a Key to Recovery, Detroit Adds to the Pain
With General Motors about to follow Chrysler into bankruptcy, the nation’s ability to bounce back from the steep recession is being hobbled.
Although housing and a credit freeze caused the current collapse, manufacturing has played an outsize role in past recoveries, with the auto industry contributing significantly to the growth. It was manufacturing that led the economy back from the last steep recession, in 1981-82. It did so by stepping up production and hiring more quickly than others in anticipation of rising demand.
Even now, in its diminished state — representing only 11.5 percent of America’s output, down from 20 percent in 1980 — manufacturing could have a bigger impact than its size suggests, because of its tendency to respond quickly.
“Back then, it supercharged the recovery,” said Mark Zandi, chief economist at Moody’s Economy.com, “and today it could have played a decisive role if G.M. and Chrysler had remained viable companies. Without their contribution, the economy simply can’t recover as quickly as it has in the past.”
Those two giants alone accounted for 10 percent of the upturn after the early 1980s recession, Mr. Zandi said, but this time they will be a drain on growth rather than a contributor to it.
In the early 1980s, once the Federal Reserve had cut interest rates, the nation’s manufacturers led the way in turning the economy from contraction to growth in less than four months. Economists described that recession, which lasted 16 months, as “V-shaped,” meaning a precipitous decline followed by an equally rapid return to growth once the recession had run its course.
That was a common characteristic of earlier recessions in the postwar years. After the 1980s, however, there were two declines, in 1990-91 and 2001, both shallow, as were the subsequent recoveries.
Now one leg of the V is back, suggesting a sharp rebound soon, if the recovery were to conform to past patterns. That seems unlikely, largely because of the drag from autos — not just the big assemblers, like G.M. and Chrysler, but also the thousands of small companies that supply them with parts.
“No other industry is stepping up to the plate to replace the Big Three and their suppliers as engines of growth,” said Nigel Gault, chief domestic economist for I.H.S. Global Insight, “and without the kick they once provided — resuming production and recalling workers faster than others — the recovery will be slow in coming and muted at best.”
Chrysler’s decision to shut down its factories and G.M.’s move to idle most of its locations this summer will inevitably have a domino effect on the nation’s 4,000 suppliers, most likely undoing the fledgling improvement that forecasters see in slightly stronger retail sales and consumer confidence.
The automakers’ problems are forcing some of the suppliers to close and others to cut more jobs, a process likely to accelerate unless other big assemblers like Ford, Honda and Toyota somehow pick up the slack.
Together, the suppliers employ many more people than the assemblers — Detroit’s Big Three and the foreign automakers operating here — and they are eliminating jobs at the same rapid pace, putting tens of thousands of people out of work each month.
The struggling suppliers are companies like Yarema Die and Engineering, in Troy, Mich., which in better times employed 110 people stamping out metal auto parts like fuel tank straps, roof supports and brackets. Most of its products went to Chrysler and G.M., and now with those operations cut way back, Yarema has suspended production, cutting its staff to just two people from 25 a month ago.
“Basically, we are in hibernation,” said Greg Boulard, director of manufacturing operations. “We are filling what orders there are from inventory, and we have laid off the entire staff.”
The damage already done by the auto industry is sobering. Of the 5.7 million jobs lost since this recession began 18 months ago, 1.6 million were in manufacturing, and 289,000 of those were in motor vehicles, split almost evenly between the assemblers and their supplier networks.
During the worst months of the recession, from September through March, these twins also accounted for nearly 20 percent of the decline in the nation’s gross domestic product, the broadest measure of economic output.
And the damage continues, with G.M. preparing to enter bankruptcy, just as Chrysler exits to begin what may be a slow transformation as part of Fiat. Both American companies usually shut down or scale back production for one month in the summer, but they are stretching that to two months or more.
The production of cars and sport utility vehicles had stabilized in early spring at roughly 423,000 vehicles a month, down from nearly 600,000 late last year. Then with the government bailouts proceeding in earnest, auto assemblies plunged to just 371,000 in May, as Chrysler entered bankruptcy, halting production. Another drop is likely in June as G.M. cuts way back — one goal being to allow dealers to work down their inventories.
That means the worst is still ahead for the suppliers. They deliver parts to the assemblers on an as-needed basis and are normally paid 60 days after delivery. Short-term bank loans carry them until payment comes from the automakers. That system broke down in the credit crisis, but the federal government stepped in, supplying $8 billion to maintain the payments.
Now a new issue looms. With Chrysler shut down and G.M. preparing to cut back sharply, deliveries to those giant assemblers are grinding to a halt.
Once payment is made by early August for the most recently delivered parts, the flow of money to the suppliers will fall way off, forcing further layoffs across a network of parts companies that employ 450,000 people. The American and foreign-owned assemblers, by comparison, employ only 309,000 in the United States today.
“There will definitely have to be more government aid flowing to the suppliers to keep them afloat,” said Haig Stoddard, an automotive analyst in Detroit for I.H.S. Global Insight.
This new damage to the auto industry, particularly to the suppliers, is likely to show up first in the statistics as a surge in job losses in June. The monthly tally, covering every industry, had dipped to 539,000 in April, the Bureau of Labor Statistics reported, from more than 680,000 in February and again in March.
The May report, to be released on Friday, is likely to be close to the April number, but then is likely to jump as auto suppliers cut back their operations or go out of business.
“The exact timing is hard to say, but we’ll get the first signal from new claims for unemployment insurance,” Mr. Gault said, referring to a number issued weekly by the bureau. “They are likely to spike soon.”
Unless demand unexpectedly begins to rise and new-car sales perk up as consumers who had put off trading in their aging vehicles begin to do so. Then the foreign auto companies operating assembly plants here might lead the way in recalling workers, contributing to a recovery — a gradual one, to be sure, without the bang that G.M. and Chrysler once made possible.
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