Thursday, November 6, 2008

Detroit Could Be In For Severe Struggles

According to a study commissioned by the Center for Automotive Research, a failure in the U.S. auto industry could cut up to 2.5 million jobs and reduce personal income in the U.S. by $125 billion. Obviously if this were to happen, Detroit and the rest of the cities in the U.S. which depend on automakers would be devastated. Too often people focus only on the job losses that would come directly from the automakers; in reality, it is much bigger than that. What about the vendors, car dealerships, truck drivers and so on? When you start to think about all the companies that are dependent on automakers, you can see how the potential job losses could rack up quickly. So what would happen to cities like Detroit if this were to happen, and what are the chances of it actually happening?

First off, I’ll start by saying the automakers have been pushing hard for some of the bailout funds being thrown around by the government right now and have been rejected so far. If anything is going to get the government to change their minds, it is the doomsday scenario that is being painted by this study. There is no way that the government is going to sit back and let 2.5 million people lose their jobs. The real question is, how realistic are the projections being made in this study?

It should also be noted that the study does predict that, by 2011, around 1.5 million of those workers would be hired back as the industry reorganizes and rebounds. So when all is said and done, only about a million workers would be out of work, but that doesn’t change the fact that for a period of time there would be an additional 2.5 million workers added to the ranks of the unemployed. These projected numbers are also worst-case. Pretty much if everything goes wrong that could go wrong, this is what we could be faced with. Realistically, we would likely see something much mellower than what is detailed in this study. While in all likelihood Armageddon will be avoided for automakers, that doesn’t mean they are in the clear, and neither are the towns dependent on them.

2.5 million workers out of a job is a bit of a stretch, but we very well could see hundreds of thousands as this recession rolls along. This does not sit well with local economies that are already struggling. Some of these cities are trying to establish themselves in other industries, such as Detroit with the casino and convention industry, but in an economy like we have now this will be extremely difficult. In addition, if they haven't already done so, there is no way they are going to be able to properly diversify their industry base in time to save their local economies, as the automakers are unlikely to last much longer as is. There is always the wildcard that the new president-elect Barack Obama could come riding in on his white horse and bail the auto industry out. However, that is assuming that he would be able to act in time to save them, and that he would even want to, considering all the other obligations we are faced with.

All in all, I would be cautious as an investor in markets that rely on the auto industry. Sure, the real estate looks like an incredible deal, but how much is a house really worth if you are as likely to get your house cleaned out of everything valuable by thieves as you are to find a tenant? Who wants to live in an area full of vacant, decaying homes? Many streets in these areas are already like this, and if more mass layoffs happen, you can bet this epidemic will continue to spread. Unless you are a gambling person willing to make a bet that Obama is going to come in and save the day, I would suggest that you look elsewhere for your investments, because without serious help (and quick), the U.S. auto industry is going to go downhill fast and will take these auto towns with them.


Anonymous said...

Hey Chicagoans,

Get ready to see a LOT more Michigan plates driving around

Anonymous said...

I don't understand why taxpayers should bail them out just to keep their overpaid jobs and exorbitant health care and pensions for retirees. For example they people $60,000 to mow grass.

I blame unions and management. Now both should loose.