PAIN AT HOME
Detroit's Ills Symptomatic Of a Manufacturing Plague
Friday, October 10, 2008
DETROIT -- First it was the outsourcing of components, and then vehicle assembly. Then gasoline prices shot up, slashing demand for trucks and sport-utility vehicles. Now, just when things seemed as if they could not get any worse here, the credit crunch and the subsequent stock market meltdown have dealt powerful new blows to the nation's already reeling car industry.
Concern that tightening credit and an overall economic downturn will lead fewer people to buy new cars sent General Motors' stock price plunging 31 percent Thursday to close at $4.76, the lowest since 1950. Ford Motor fell 21 percent, closing at $2.08.
Thursday's automobile stock sell-offs sparked new concern among economists and investors that the U.S. manufacturing sector, which had been slowly constricting, may be squeezed to an unimagined degree by the turmoil on Wall Street, posing a serious new economic threat at a time when the nation is already struggling with a financial sector collapse.
Nowhere is the pain more evident than in Michigan. Falling sales of vehicles and heavy equipment have sent ripples through the manufacturing food chain. The state's unemployment rate is now 9 percent, the highest in the nation. One in 16 home mortgages is "seriously delinquent," trailing only Florida and Nevada.
"It's devastating," said Gov. Jennifer Granholm (D), who added that Michigan has lost nearly 400,000 manufacturing jobs since 2000. "Companies . . . that are already slammed by globalization are being slammed by the credit crunch."
GM's market capitalization now stands at $2.69 billion. The day after the 1929 stock market crash, the company was worth seven times as much in inflation-adjusted dollars, according to market historian Bryan Taylor of Global Financial Data.
The current crisis is worsening a long-term trend for the U.S. auto industry. Over the past eight years, Michigan has lost 47 percent of its vehicle manufacturing jobs and 27 percent of other manufacturing jobs, according to a government analysis. Nationally, the losses have been about 21 percent in each category.
In an economic downturn, automobile companies are often the first to feel the pinch as consumers postpone expensive purchases. Industry sales dropped last month to levels not seen in almost 20 years. Ford fell 34.5 percent compared with the previous September; Chrysler, 32.8 percent; and General Motors, 15.6 percent. Even Toyota, known for fuel efficiency, saw sales drop by 32.3 percent.
Not since 1993 had automakers sold fewer than 1 million cars in a single month. Yet with fear ruling the marketplace and banks reluctant to lend money even to borrowers with strong credit, analysts believe next year's numbers are likely to be as bad.
That means lower revenue for automakers and less money to spend on needed innovation. It means fewer jobs beyond the factory gate. According to David E. Cole, a researcher in Ann Arbor, Mich., every auto plant job generates nine jobs among suppliers and the surrounding community -- four times the multiplier of a typical Wall Street slot.
Ford senior economist Emily Kolinski Morris, who likened an economy without credit to an engine without oil, said: "The dire warnings are not terribly overstated."
Inside a former Cadillac factory in Detroit, Frank Venegas runs Ideal Group, an array of businesses, some closely connected to the auto industry. He is accustomed to doing $100 million worth of annual construction work for GM, but he expects to see fewer construction cranes and is already shipping fewer steel beams for private homes.