LANSING – It seems all anybody wants to know is when the national recession will bottom out, but unfortunately even answers to that question were on shaky ground Friday as Michigan deals with the bankruptcy of part of the domestic auto industry.
While there is some indication the national recession is on its way out, economists told the Revenue Estimating Conference on Friday the recovery stage will likely be less robust than after previous recessions.
The key to recovery will be the financial system, said Samuel Kahan, senior economist for the Detroit branch of the Federal Reserve Bank of Chicago. With the collapse of the sub-prime housing market, closing of financial institutions and the freezing of credit markets, Kahan said confidence sank and economic activity across all sectors declined.
But unemployment, which is a lagging indicator of how the economy is performing, declined in April to 539,000 job losses. While 6 million jobs have been lost since 2007 across the country, Kahan said there appears to be a stabilization in housing and a slowing of liquidation.
There is still a concern about adequate capital and liquidity in the financial system and the credit market is still tight, he said, but consumer spending increases in the first quarter of the year after seeing sharp declines the two previous quarters.
Business activity will likely remain constrained as long as the financial sector is that way, Kahan said, but the United States is not the only one struggling.
“The recession is a worldwide phenomenon and that has harbored exports,” he said.
While typically the recessions that are severe are followed by a stronger recovery because there is so much pent-up demand for goods, Kahan said businesses and consumers could still be cautious coming out of this recession and therefore demand would not be so high.
Kahan said the United States could even see a jobless recovery with this recession, but he cautioned there is considerable uncertainty surround the outlook.
And he said Michigan is on a different path than the United States because even as the world economy improves, Michigan will have to deal with its structural problems related to how dependent it is on the auto industry.
Alan Deardorff, an international economics and public policy professor at the University of Michigan, told the panel Michigan is more vulnerable to international shocks such as foreign recessions because it is still a large exporter of goods, particularly transportation.
Sean McAlinden, chief economist and vice president for research for the Center for Automotive Research, laid out two scenarios for Chrysler or General Motors as the former is in bankruptcy and the latter is likely to face a similar fate by the end of the month.
A “good” bankruptcy for either automaker would have them emerging within 60 to 90 days, with customers forgiving the bankruptcy and sales recovering. While employment and production cuts will still happen under a good bankruptcy, the process could provide for an orderly consolidation of the supplier and dealership base, he said, warning that dealerships in particular should care about cooperating otherwise $1.2 million worth of vehicles will be dumped on the market by bank seizures and the dealerships that didn’t help take in some of that inventory could be on the “second list” for closures.
But McAlinden emphasized the need for the federal government to continue supporting the carmakers through bankruptcy.
A “bad” bankruptcy would mean either automaker would not emerge from bankruptcy as they are mired with lawsuits from creditors and sales continue to fall. The scenario involves the federal government eventually pulling the plug on assistance and suppliers liquating.
While all of this could be catastrophic to the industry, workers and the state, McAlinden said one of the most problematic effects would be on the state’s health sector if retiree health care benefits are eliminated.
“I’m starting to get calls from doctors on their impact. They should be worried,” he said.
While he said Michigan retail sales would also decline under the bad bankruptcy scenario, the state would immediately be impacted by either company not being able to make its payments for unemployment benefits as those rolls skyrocket.
Under a quick, successful bankruptcy, 63,200 jobs would be lost in the United States through the end of 2009, 13,000 of which would occur in Michigan. For 2010, that would mean a loss of 179,400 U.S. jobs with 35,700 from Michigan.
A long, disruptive bankruptcy would mean 1.3 million jobs lost, 224,400 of which would occur in Michigan through the end of the year, Mr. McAlinden said. Another 446,700 jobs would be lost in 2010, with 113,700 of them occurring in Michigan.
“If it’s long and drawn out, most plants that are now idled will never reopen,” he said.
Senate Fiscal Agency Director Gary Olson noted the forecast doesn’t include the impact on autoworker pensions. There are currently 500,000 Michigan residents who are retirees of the automotive industry.
McAlinden pointed out that much of the bankruptcy job loss for Michigan already has occurred as the car companies have been restructuring and preparing for their legal issues.
State Treasurer Robert Kleine asked McAlinden what the probability of a bad bankruptcy would be for either carmaker.
For General Motors, which McAlinden said such a bankruptcy is almost certain, he put the odds at 50-50. But he said Chrysler’s probability is less than that.
The consumer is likely to penalize carmakers that are in bankruptcy, McAlinden said. While vehicle sales are down for all manufacturers, companies not in bankruptcy will probably see a 35 percent to 38 percent decline in sales compared to a 45 percent to 50 percent decline for companies in bankruptcy.
A bright spot to all the bankruptcy talk was Ford, which has seen some of its market share recover in recent months, McAlinden said.
Still, he didn’t see a bottoming out of vehicle sales just yet. While he said the SFA report on vehicle sales were some of the “most doom and gloom” estimates he’s seen, the center expects vehicle sales to get back up to 15.2 million units by 2013-14, with another decline predicted in 2016.
George Fulton, director of the University of Michigan’s Research Seminar in Quantitative Economics, gave some critiques to McAlinden’s presentation although he noted it’s “a very difficult rime for all of us to forecast in Michigan” due to the “unprecedented evens occurring and changes almost daily.”
Fulton said the two bankruptcy scenarios laid out contain a range of possibilities because everybody simply doesn’t know all the details of how things will work out.
While McAlinden could be undercounting the dealer impact to the economy, Fulton argued the forecast focuses too heavy on the impact in the current year and not in 2010, where he said there will likely be more effect.
And while there is a lot of focus on southeast Michigan in terms of the auto sector, Fulton said the smaller communities where vehicle manufacturing is more concentrated would likely be harder hit by the downturn. The same would go for dealers that are concentrated in smaller communities.
While auto manufacturing is lacking long-term growth potential at this point, Fulton said future growth will come from the engineering and research and development part of the business and not from the traditional manufacturing component.
Without a severe bankruptcy for Chrysler or General Motors, the state’s economy should see a modest recovery in 2011, McAlinden said. Meaningful upswings in employment are also likely not to occur until then as well.
This story was provided by Gongwer News Service. To subscribe, click on Gongwer.Com
