Millions of Jobs, Billions of Dollars Lost Across the U.S. If Detroit Three Disappear or Even Contract Some, CAR Study Says

Millions of Jobs, Billions of Dollars Lost Across the U.S. If Detroit Three Disappear or Even Contract Some, CAR Study Says

By Michelle Krebs November 5, 2008

By Michelle Krebs

As many as 3 million jobs and hundreds of billions of dollars will be lost from the U.S. economy if General Motors, Ford and Chrysler cease operations, a new report shows.

The report by the Center for Automotive Research (CAR) details the job losses and economic impact of two scenarios: if all three Detroit automakers cease operations next year; and if Detroit automakers contract by half, likely involving two automakers going out of business.

"Either of these scenarios is possible, and indeed probable, within the next 12 months," the study says.

In both scenarios, the impact is devastating for jobs, income, the nation's tax base and consumer spending that could pull the U.S. economy out of recession. 

Other automakers doing business in the U.S., including Toyota and Honda, also would be hit as would Canada and Mexico. 

Case Study A: Detroit Three Cease U.S. Operations

About 3 million jobs in the U.S. economy would disappear if GM, Ford and Chrysler were to cease operations completely in 2009, the CAR study concluded.

Of the 3 million lost jobs, 239,341 would be directly from Chrysler, Ford and GM. Another 973,969 would be supplier jobs or jobs indirectly related to the cessation of Detroit Three operations. Yet another 1.7 million plus "spin-off" jobs -- that is jobs lost due to reduced spending by the people who have lost their jobs with the auto companies and related jobs -- would be lost as a result of their demise.

Analysts say for every one auto company manufacturing job lost, five other jobs in the economy are lost as well.

The loss of those jobs would be somewhat mitigated in the ensuing two years as U.S. vehicle production by foreign automakers building vehicles in the U.S. fills the void and dislocated workers find new jobs. By 2010, some recovery would be experienced with lost jobs totaling 2.5 million and by 2011 lost jobs would be 1.8 million. In economic terms, the disappearance of the Detroit Three would result in the reduction of U.S. personal income by more than $150.7 billion in the first year, and generate a total loss of $398.2 billion over the course of three years.

The CAR study outlined the personal income loss on government operations at the local, state and federal levels including an increase in transfer payments, a reduction in Social Security receipts and personal income taxes paid.

The net impact of all three of these categories is negative on the government balance sheet, resulting in a loss to the government of $60.1 billion in 2009, $54.3 billion in 2010, and $42.0 billion in 2011 -- a total government tax loss of over $156.4 billion over three years.

The CAR study doesn't look specifically beyond the economic implication on government entities. However, personal income is one of the bellwethers -- along with employment -- for consumer spending. With unemployment up and personal income down, consumer spending on anything from television sets to new vehicles declines.

Case Study B: Detroit Three Automakers Cut by Half

If one or more of the Detroit Three fail in 2009, all U.S. automotive operations would be affected initially. That would include foreign automakers with manufacturing in the U.S., including Toyota, Honda and Nissan, and suppliers.

In the the first year after a contraction by half of Detroit's automakers, nearly 2.5 million jobs would be lost in the U.S. economy. Of that amount, 239,341 jobs would be GM, Chrysler and Ford jobs. Another 795,371 indirect and supplier jobs would disappear. And more than 1.4 million spin-off jobs would go away.

The CAR study notes the employment picture improves in 2010 with 1.5 million jobs lost and in 2011 with 1 million jobs gone, due to the resumption of U.S. production by the surviving Detroit automaker, foreign automakers filling the void and some dislocated workers finding new employment.

In economic terms, a reduction by half in Detroit automakers' U.S. operations would reduce personal income by more than $125.1 billion in the first year for a total loss of $275.7 billion over the course of three years, CAR concludes.

The impact of the personal income loss on government operations at the local, state and federal levels include an increase in transfer payments, a reduction in Social Security receipts and fewer personal income taxes paid. The net impact of all three of these categories results in a loss to state and federal government of $49.9 billion in 2009, $33.7 billion in 2010, and $24.5 billion in 2011, for a grand total government tax loss of more than $108.1 billion over three years. 

Fodder for a Bailout

The CAR study is expected to be widely circulated in Washington, D.C. -- and likely will land on the desk of President-Elect Barack Obama, as evidence to support an auto industry bailout. The study, done independently by CAR and not commissioned by a third party, was released quietly and selectively on Election Day Tuesday and now is in limited circulation.

The study by CAR, an automotive think tank headed by former University of Michigan professor Dr. David Cole in Ann Arbor, Michigan, is an expanded version of a similar study done on the impact of the demise of Detroit automakers on the Michigan economy. That study recently was presented to Michigan Governor Jennifer Granholm, rumored to be headed to Washington to work for the Obama administration.

Indeed, an aspect sure to grab the attention of federal officials, in addition to the massive economic losses in contributions to government coffers and Social Security, is the "serious implications" for pension funds and the obligations of the government's Pension Benefit Guarantee Corp. if any of Detroit's automakers go bankrupt. Another eyebrow raiser surely will be the impact on the nation's health care system. The Detroit Three are directly and indirectly responsible for funding the health care of 2 million employees retirees and dependents of their own companies and their suppliers, the study points out.

Indeed, the auto industry has long been and continues to be an important sector of the U.S. economy, the study notes. The motor vehicle and parts industries employed 732,800 workers directly as of September. The Detroit Three employed 239,341 hourly and salary workers in the U.S. at the end of 2007. Foreign producers employed about 113,000 people in the U.S. at the end of 2007.

The auto industry "has one of the largest economic multipliers" of any sector in the U.S. economy. Analysts typically estimated for every job at a car plant, another five jobs are tied to it. The auto industry sector is "sufficiently large that its growth or contraction can be detected in changes in the U.S. Gross Domestic Product," the study notes. In many states, auto and auto-related employment rates among the top three manufacturing industries.

"Supplier Shock" Socks Foreign Makers Initially

And Toyota, Honda and the rest don't escape unscathed either, at least initially. The study concludes that if auto production from Detroit makers ceases, so, too, will production by foreign automakers like Toyota and Honda, doing business in the U.S. because of a "supplier shock."

"We expect a major wave in supplier bankruptices or a supplier shock," the study says. "The collpase of a domestic market for suppliers, coupled with the reality that few auto suppliers serve export markets, would result in manufacturing utilization rates below 50 percent, forcing suppliers to restructure or liquidate."

The study further notes that the scale of supplier shock would "overwhelm any attempt by the international producers to keep their existing suppliers in business or to find alternative suppliers, in the U.S. or elsewhere.

The study doesn't expect foreign automakers will lay off their U.S. employees through this, and that by the third year after the demise of Detroit automakers, they will be back in full operation and have expanded to at least take up some of the lost Detroit production, about 20 percent of Detroit output, the study estimates.

The demise of half of Detroit's auto industry has the same supplier crisis for all automakers but foreign makers would recover fully by the third year and surviving Detroit companies would restore production to 50 percent of the former combined level by the second year and maintain that level for the third year.  

Consumer Choices Limited

Under the harshest of the scenarios, the U.S. consumers' choice of vehicles would be extremely limited for about a year -- limited only to imported vehicles, the study concludes.

Impact Seeps Across U.S. Borders

A permanent contraction of the U.S. auto industry would negatively impact the auto industries of Canada and Mexico, since producers in these regions rely heavily upon U.S.-produced parts and components, the study concludes.

"This interdependency of the NAFTA automotive producers means that the total economic impacts presented here underestimate the full impact of the scenarios. The decline of Detroit Three production in Canada and Mexico would result in further U.S. losses in employment, income, and government revenues," the study says. 

Photo by Chrysler
A Chrysler worker assembles a 2009 Dodge Ram at a Warren, Michigan, plant.

 

Michelle Krebs:  is Editor-in-Chief of AutoObserver.com. Follow @AutoObserver on Twitter.