GM strike lasting more than a week could send Mich. into recession
A United Auto Workers strike at General Motors Co. lasting longer than a week could send Michigan's economy into a recession for the first time since 2010, according to experts.
With 14 manufacturing sites blocked by picket lines, Michigan is at the greatest risk of a decline in consumer purchases, drops in income and corporate tax revenues, and an increased demand on its unemployment insurance system. In addition to the UAW workers on strike, some non-union workers are being shut out of facilities, and it won't be long before parts suppliers and other associated businesses begin laying off workers.
"If we have a strike of less than a week, Michigan, Ohio and Indiana will feel it, and the rest of the country will largely absorb it," said Patrick Anderson, CEO of Lansing's Anderson Economic Group consulting firm. "Past 10 days, you're starting to risk Michigan going into a one-state recession, particularly southeast Michigan."
A strike that lasts about a week would create a "fractional drop" on national economic growth this quarter, Anderson said. A work stoppage, however, would take much longer before it could send the U.S. economy into a recession — and that's not likely.
"Once the foothold becomes too large and no makeup is possible within a month or two, that's lost production and lost income, which results in national implications," said Daniil Manaenkov, a U.S. forecasting specialist at the University of Michigan's Research Seminar in Quantitative Economics. He said that with the modest pay UAW members are receiving while on strike, the work stoppage is unlikely to last longer than a few weeks.
After 12:59 p.m. Sunday, 46,000 UAW members walked off the job at a dozen assembly plants, 19 parts distribution centers and 22 other plants in the United States to pressure the Detroit automaker to ensure job security, provide higher wages and protect their health care.
While GM employs the most workers of the Detroit Three, in recent years its total number of UAW workers has dropped to the fewest of its crosstown rivals. The 46,000 strikers are well shy of the 73,000 GM workers who walked out in 2007 during the last national strike.
"This is not 1979 – General Motors does not dominate the auto industry anymore," Anderson said. "The UAW is no longer a linchpin of the general economy like it once was."
For comparison, roughly 800,000 federal workers missed two paychecks while being furloughed during December and January when the federal government shut down for five weeks. There was no recession, but it cost the economy $11 billion due to lost output from federal workers, delayed government spending and a reduction in demand, according to the Congressional Budget Office.
Lost production for GM could cost more than $50 million in earnings before taxes and interest per day, investment firm Credit Suisse's Dan Levy estimates. But the strike does not immediately pose a credit risk for GM, Fitch Ratings Inc.'s Stephen Brown said in a note Monday.
It will hit much closer to home for striking employees. UAW members get $250 per week in strike pay. That's equivalent to $6.25 per hour for a 40-hour workweek, less than the $7.25 U.S. minimum wage and well short of Michigan's $9.45. Plus, the pay for the first week won't be distributed until the 15th day of the walkout. The members do receive health care.
Without workers making vehicles, other nonunion contractors in the plants are getting their work put on hold, too, Anderson said. And the supply chain and its workforce could be affected in days, as the auto industry's "just-in-time" production system has decreased the amount of time assembly plants have before needing more parts, Anderson said.
Add in a trade war with China and Iranian attacks on Saudi Arabian oil fields, and it is a "combustible mix of politics and economics that is quite dangerous for Michigan and the auto industry," Anderson said. Plus, the Michigan Legislature has yet to pass a budget with an Oct. 1 deadline looming before a shutdown. Together with the strike, it would be "black eye" for the state, Anderson said.
Last week, LendingTree identified Michigan as the state with the highest risk for a recession in the fourth quarter. Its analysis put the probability of weak economic fundamentals in the fourth quarter of 2019 at nearly 59%, following recent months of higher unemployment and weakness in wages, said Tendayi Kapfidze, LendingTree's chief economist.
"There's an overall impact of confidence in the state in terms of you don’t know when the strike is going to end," he said. "Nationally, that has an impact on consumer confidence combined with other things like the oil price situation. People may think they need to be more cautious in their spending."
Meanwhile, GM's inventory at dealerships is estimated at 77 days, according to Cox Automotive, though the days' supply of its popular profit-heavy trucks and SUVs is even more robust at 80 days. As a result, dealerships shouldn't be affected in the near term, Anderson said.
Should the strike persist, however, GM's already weakened market share could suffer a permanent setback with negative consequences to the UAW.
"Our analysis suggests that consumers have ample opportunities to buy other vehicles produced by both domestic and imported carmakers," Anderson said. "For many consumers, GM is still saddled with the 'government motors' stigma. It’s a gamble between the union and the company that consumers will come back to their product. It's particularly risky for the UAW and GM at this time."