The timing is notable.
A decade after the Great Recession threw the Detroit 3 into a tailspin, along with so many Americans who lost their homes and life savings, General Motors CEO Mary Barra on Monday announced her company will shutter factories and eliminate an estimated 14,000 white collar and blue-collar jobs.
Critics decried her as ruthless. And the value of GM stock grew.
Soon Ford Motor Co. will announce its early retirement buyouts amid reorganization, a signal that the economic landscape goes beyond GM. No question, things were bound to deteriorate. The whole business is cyclical, after all.
And the largest car market in the world, China, is seeing a slowdown, too.
So cutting passenger cars once seen as key to U.S. carmakers’ recovery appears to make sense.
Yet no one needs to be frightened, economists say.
America is at full employment and that’s good for the economy.
But when GM sheds about 7,000 workers in the metro Detroit area, for a total of 14,000 or so in North America, that’s significant.
When Ford is forecast to trim 10,000 workers from its rolls in metro Detroit for a total of 20,000 or so in North America, well, those numbers start to add up.
The next dip
“Car sales hit a record in 2016 and have been edging downward since,” said Michelle Krebs, senior analyst for Autotrader. “At the same time, the auto industry is on the verge of potentially massive change. Auto companies are investing in future things, like autonomous vehicles, electric vehicles, mobility services like ride sharing. No one is clear on when those will turn a profit.”
She continued, “The major takeaway of the Great Recession was that automakers must keep their cost in line so that even if sales plummeted they could still break even or eke out a profit. Coming out of the recession, automakers laid off workers and cut plant capacity … They’ve gotten a bit complacent. As the good times came, the companies added people. Companies like Ford have said maybe they added too many. So now they’re preparing for the next dip. They’re preparing for potential downturn.”
What feels today like an upbeat economic atmosphere is misleading, economists said.
And focusing exclusively on the strength of America and the U.S. dollar can be a mistake. Markets now are so interconnected that the buying power of Chinese consumers, for example, directly impacts the jobs of people in America.
“The global business environment is softening,” said Ellen Hughes-Cromwick, associate director at the University of Michigan Energy Institute and senior adviser for Macro Policy Perspectives. “Consequently, here in the U.S., we’re in the 10th year of an economic expansion. We’re starting to see the cyclical part of the economy roll over. We’ve seen housing starts really languish … the best of times are now in the rear view mirror.”
Rain on parade
While recessions are notoriously difficult to forecast, ingredients do exist for an economic downturn.
“Now you will start to see a lot of cutbacks, not just trimming. These are leading cyclical indicators,” Hughes-Cromwick said. “You can look out your window and say, ‘Wow, we’re going to have an incredible holiday season. Retail sales are doing great, there’s a low unemployment rate, wage growth is moving up.’ All of that is great, to be sure, but it may be misleading. We don’t want to rain on good news, but the leading indicators are worrisome. News of job cutbacks at major companies is a signal.”
In three to six months, things will likely pivot, she said.
“It’s a false premise to think that we can do well and everybody else doesn’t. There’s a co-dependency relationship because of the way our global economy has grown up over the years. We can never spin out, so to speak, and be a planet independent of all the other stars in the universe.”
That applies to Detroit. To Michigan. To the Midwest. To America.
“The future of work is right in front of us. We have got to aggressively tackle how we help workers for the future,” Hughes-Cromwick said. “We have got to have our workforce ready and raring to go on software engineering, data science and taking data out of vehicles and harvesting it for new revenue streams.”
Meanwhile, Michigan job growth will definitely slow but so few workers are job hunting while so many employers are hiring that things should be fine in the near term.
“We want our tone to be responsible. We don’t want to be panicking,” said Gabriel Ehrlich, an economic forecaster based at U-M who specializes in the U.S. and Michigan economies. “We do see a slowdown in manufacturing and professional and business services _ that includes white-collar auto, engineering, design, computer design. And in the state of Michigan, that’s tied closely to manufacturing.”
Still, he said, “We shouldn’t overreact. It’s not time to panic.”
Unemployment claims, filed by people after they’ve been laid off, are at the lowest level since October 2000. Michigan is seeing unemployment fall below 4 percent, he noted.
“Don’t get me wrong. This is worrying news,” Ehrlich said of GM’s cuts. “There is never a good time to lose your job, but it is much harder on workers to lose their jobs during a recession. Right now, we’ve had nine straight years of year-over-year job growth.”
Key: 2019 is a time to be “sober-minded and cautious,” he said. “We expect more of a slowdown nationally in 2020.”
“Don’t panic, keep calm and carry on,” Ehrlich said. “In Michigan, we’re seeing more jobs in the service industries, from goods producing and a manufacturing economy to a service economy. There’s steady growth in health care and hospitality.”
At the same time, thousands of autoworkers are headed into contract negotiations in 2019 to shape their wages and benefits for the next four years. Factory workers say they made sacrifices during times of economic distress to help the car companies, and now the companies have rewarded investors instead of the employees.
“This cyclical downturn could get worse before it gets better,” said Harley Shaiken, a professor at the University of California, Berkeley and a national expert on labor. “The U.S. economy is doing OK, but the rest of the world is sliding. That’s not sustainable. The cars you thought you couldn’t do without? You may be wondering instead what kind of bus pass you’re going to have.”
This latest action by GM, after workers “made pretty extraordinary contributions to the company,” is really “a punch in the gut,” Shaiken said, especially for the white-collar workers.
Too often, car companies offer job training after the fact. There’s no preparation, he said.
And with every job lost in the auto industry, an estimated five jobs in the community are affected.
“GM is being, in a business sense, very proactive,” said Shaiken, whose grandfather worked at Ford. “But I think they are underestimating the pain and the reaction.”
Meanwhile, Ford reissued a summary of its upcoming plans to “transform” the business through actions over the past 18 months to “redesign and restructure” its global operation.
“We are in the early stages of reorganizing our global salaried workforce to support the company’s strategic objectives, create a more dynamic and empowering work environment and become more fit as a business. The reorganization will result in headcount reduction over time, and this will vary based on team and location,” Ford said in a statement on Monday, in response to the GM action.
People are delusional
The global economy is driving good and bad developments, regardless of political party, said a frustrated Jon Gabrielsen, market economist who advises automakers and auto suppliers.
“Anyone who thought (President Donald) Trump could save their jobs was delusional. No person, whether Trump or not, had any more chance of reversing rapidly changing trends than to swim up Niagara Falls,” he said. “Corporations don’t enjoy doing this and their investors don’t enjoy the huge costs to do so. But it sure beats not doing it and going out of business.”
GM timing goes to strategy, Gabrielsen said. There is a financial advantage to announcing big cuts before Dec. 31. It all involves a bookkeeping strategy that benefits investor relations and allows the company to claim certain losses and later revise and claim certain gains.
“Investors only look forward, so if you take a massive charge, they immediately forget about it and forgive that it tanked your earnings or even created a loss for the current quarter or year,” Gabrielsen said.
A week ago, he accurately predicted the number of jobs that GM would cut.
This time, Gabrielsen estimates the unemployment impact of the direct Detroit 3 salaried job cuts for the metro area could raise unemployment by a little over 1 percentage point just from the Detroit 3 salaried employees, and with the multiplier impact that could add as much as 4 to 5 points to the metro unemployment rate, which was 4 percent in October 2018.
Fiat Chysler has made no announcements related to cuts or closures.
“In the last cycle, unemployment went from 4.5 percent in January 2001 to 16.4 percent in June 2009,” he said. “So rising from 4 percent to 8 or 9 percent unemployment is well within reason.”
While the national employment and unemployment levels are likely to remain favorable for hiring in the near term, once job cuts like this begin, the affected areas see a pattern of unraveling that includes hiring freezes and job cuts in other industries.
“It goes from an auto supplier all the way to the clerks at Kroger,” Gabrielsen said. “Anywhere there’s an assembly plant or an auto-related plant that’s going to close, it’ll wipe out the town. Anyone who loses a job will have to move to get a job.”