TPT May 2008

From the Americas

The economy Broadening impact of the American Axle labour dispute prompts use of the dreaded ‘R’ word: recession Some 3,650 workers represented by the United Auto Workers (UAW) have been on strike against the Detroit-based auto parts supplier American Axle & Manufacturing since 26 February, and no resolution is in sight. On 30 March, Detroit Free Press business writer Jewel Gopwani observed that the auto industry’s latest labour dispute was about more than wage and benefit cuts for one company’s workers. Making her meaning very plain was the title of the article posted on the paper’s website freep.com: ‘American Axle strike tipping the nation closer to a recession.’ Ms Gopwani wrote, “The strike has idled dozens of factories at former owner and top customer General Motors Corp, as well as several parts makers [besides American Axle]. Those companies are losing out on sales, while thousands of workers are missing their paychecks. That may well be what pushes the nation into an official recession.” This was not idle speculation. By the following day, 1 April, the strike would have spread out from Detroit, where both companies are based, and forced GM to cut or stop production at 30 plants. The strike at four American Axle plants, employing 3,650 people in Michigan and New York, had already forced work to stop or slow down at 29 GM plants. At the 10 plants that had been idled altogether, as many as 18,385 hourly workers had been sent home. In a growing ripple effect, suppliers had shut down production lines and plants, laying off workers – at least 5,000 of them – as GM’s need for parts dried up. The situation did not escape the notice of a financial community already made nervous by the bad-mortgage troubles of the US lending industry. Deutsche Bank auto analyst Rod Lache told the Free Press that he had lowered first-quarter earnings expectations for GM and American Axle, as well as suppliers Lear Corp and Magna International Corp, because of the strike. Similarly, Ms Gopwani noted, Standard & Poor’s Rating Service was thinking about cutting the credit ratings of both GM and American Axle, and of Tenneco Inc, another supplier. This occurs in what already is shaping up as the weakest sales year in a decade for the automakers of Detroit, who already face declining market share and high prices for raw materials and energy. Ms Gopwani cited the estimate of Edmunds.com, a privately owned review-and-rating service for auto buyers and sellers, for a drop in new vehicle sales of 13 per cent in March, compared with March 2007. This includes a 15 per cent drop for General Motors, which was not considered likely to make up lost production of models hit by the strike. But the main thrust of the article from the epicentre of the domestic auto industry was on the broader consequences of the strike “now bleeding into the nation’s economy” . The Detroit Free Press offered three unassailable propositions and a troubling corollary: • Layoffs at GM and several of its suppliers helped boost the number of newly filed unemployment claims earlier in the month

• Lost vehicle production from the strike in the first quarter boils down to a 0.3 per cent decline in the gross domestic product (GDP) • The GDP measures the value of goods and services produced in the United States, and two consecutive quarters of a shrinking GDP is the textbook definition of a recession. “It’s possible,” Nigel Gault, chief US economist at the consulting and advisory service Global Insight, told Ms Gopwani, “[that] the strike could make the difference between a positive and a negative GDP number, because we’re so close to the zero mark.” Of related interest . . . › 27 March brought the long-awaited announcement from New Delhi of Tata Motors’ purchase of Jaguar and Land Rover from Ford Motor Co. The price of $2.3 billion — about half what Ford paid for the brands — is not the end of it for Ford, the world’s third-largest carmaker in terms of sales. When the deal is completed, probably by mid-year, Tata will get an additional $600 million to cover pension entitlements. The fast-growing Tata Group is one of India’s largest conglomerates. Other Indian companies are also eyeing the US as a weak dollar makes international takeovers attractive. Local business activity has declined in several regions of the United States, according to the most recent report from the National Association of Purchasing Management. Data released by the association on 1 April showed that business activity in the Milwaukee area of Wisconsin and manufacturing activity in Texas contracted in March over the previous month. The index for the New York area was also down. Business activity also shrank in the factory-dense Midwest in March, for the second consecutive month, while a rising price component revived concerns about recession and inflation. NAPM’s Chicago business barometer rose to 48.2 from 44.5 in February, but remained below the 50 level that separates contraction from expansion. The good news for Chicago came in the form of a sharp rise in the employment index for the area, from 33.5 in February to 44.6 in March – the biggest single-month employment gain since February 2002. Also, the new-orders index jumped from 48.8 in February to 53.9 in March. However, the measure of prices paid jumped from 79.4 in February to 83.9 in March. That is the highest since June 2006. The Federal Reserve Bank of Dallas monthly manufacturing index of general business activity in Texas slid to minus 22.7 in March, from a negative 21.4 in February. This was the ninth consecutive monthly reading below zero, indicating contraction. • The weakening US economy is taking its toll on Mexican families dependent on remittances from the estimated 10 million Mexicans living in the United States, as wage-earners living abroad send less money to relatives back home. The Bank of Mexico said 1 April on its website that remittances from abroad Regional indexes show business is off in several US localities

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M ay 2008

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