GM Strike Not Expected to Have Long-Term Effect
There was a time when a strike against General Motors Corp., the nation’s No. 1 auto maker, sent shudders from corporate suites and dealer showrooms to Wall Street and the White House.
No more. Although the auto industry is still a powerful force, it is no longer the prime engine driving the nation’s economy. Health care and computers are bigger economic contributors.
Simply put, a major strike against GM, the nation’s largest industrial company, no longer has the same crippling effect on the U.S. economy that it once did.
In fact, the United Auto Workers strikes that have nearly shut down GM’s U.S. vehicle production are likely to slow the nation’s economy slightly, but do not threaten long-term effects, economists said Monday.
The strikes at two parts plants in Flint, Mich., could trim as much as half a percentage point from the nation’s gross domestic product if the walkouts last until mid-July as expected, according to economic estimates. However, much of the lost economic output is likely to be recouped in the third quarter, narrowing the overall drop of 0.2 percentage points in the value of goods and services produced nationwide.
“I view the strikes as a mild earthquake with the epicenter in Flint,” said William Wilson, economist for Detroit’s Comerica Bank. “There are shock waves being felt throughout the Midwest, but only negligible tremors on the coasts.”
Still, the 19-day walkout by the United Auto Workers is shaping up as the worst to rock the auto industry since 1970, when a 67-day strike against GM deepened an economic recession. A top UAW official said Monday that the labor disruptions at GM could last into August and might expand to other key GM parts plants where disputes are festering.
“If we don’t find the framework to put these behind us this week, I would not be surprised if it doesn’t continue into the second or third week of August,” Richard Shoemaker, the UAW’s top GM negotiator, told Associated Press.
The strikes continued Monday to send economic ripples throughout the nation’s heartland. Already, GM has shut 24 of its 29 assembly plants in North America and laid off 122,400 workers. Auto suppliers have laid off thousands more.
“The effect on us is almost instantaneous,” said Bert Serre, spokesman for Lear Corp. The seat maker has closed nine plants and laid off 2,100 workers in the United States and Canada as a result of the strikes.
The effects are filtering down to the steel, plastic, glass and rubber industries, as well as to trucking and railroads. GM is cutting back advertising, and its dealers are concerned that profits will dry up as inventories shrink.
The biggest impacts are being felt in small cities in the Midwest dependent on GM factories. Besides Flint, where GM is the major employer, the strikes are hurting local economies in Kokomo, Ft. Wayne and Anderson, Ind., and in Janesville, Wis.
The labor confrontation comes as the nation’s economy is slowing because of the financial crises in Southeast Asia. The U.S. economy is expected to show growth of 2% to 2.5% in the second quarter, down from a brisk 4.8% in the first quarter.
The moderation in economic growth has dissuaded the Federal Reserve Board from increasing interest rates. The further slowing caused by the GM strikes is likely to be discounted by the Fed since labor disruptions tend to be transitory events, with most production losses recovered soon afterward.
“The strikes are significant events, but just a blip on the Fed’s radar screen,” said Diane Swonk, economist for First Chicago NBD Corp.
GM has lost production of 122,500 vehicles since the strikes began, according to Ward’s Automotive Report, an industry newsletter. The company is expected to lose another 102,000 cars and trucks this week.
Cynthia Latta, economist for Standard & Poor’s DRI, said every 100,000 vehicles in lost production cost the U.S. economy about $2 billion. She expects GM to lose up to 250,000 vehicles before the strike is settled.
Although GM can regain some of that production with overtime, the company is likely to suffer lost sales as some customers opt to buy trucks or cars from domestic and foreign rivals.
The strikes now match in duration a nasty confrontation in 1996 at two parts plants in Dayton, Ohio. Those strikes closed most GM plants, idled 178,000 workers and cost GM $900 million.
Analysts estimate that GM’s losses from the current strike could run to $500 million a week. “For GM, it’s just the cost of doing business,” said Wilson. “It’s not a huge concern.”
GM, which earned $6.7 billion last year and has amassed a cash cushion of $13 billion, is pushing for greater efficiency in its manufacturing operations. The UAW is fighting to stave off more job losses.
The strike’s outcome is unlikely to have much impact on auto prices or wages. The drop in GM inventories will speed up the elimination of costly rebates, but overcapacity in the industry is likely to keep downward pressure on prices.
The dispute began July 5 at a stamping plant in Flint, known for its union militancy, and spread six days later to a nearby parts plant. Even before the strikes, the city had an unemployment rate of 7.8%, the highest for any urban area in Michigan. Economists say the strike is taking $18 million out of the local economy every week.
The strikers on average make $1,058 a week, including overtime. They are only collecting $150 a week in strike pay from the union. They also stand to lose lucrative health and pension benefits while on the picket line.
Laid-off workers are eligible for state unemployment and job security pay that bring their benefits to about 95% of normal wages. GM lost a court challenge to the unemployment and job security pay in 1996, when it argued unsuccessfully that it was being effectively forced to subsidize a strike against itself. It could challenge that issue again.
The strikes demonstrate how modern production techniques are making manufacturing companies more vulnerable to strategic strikes. GM uses just-in-time inventory flow, which requires the delivery of most parts when they are needed on the assembly line.
This reduces costly inventory buildup and simplifies the production process. But it also means that a key parts factory can quickly bring a massive manufacturing organization to a halt.
Negotiations are continuing on a daily basis with no reports of progress. Talks are complicated by the UAW national convention, which has drawn the top labor negotiations to Las Vegas this week, and a scheduled two-week summer shutdown of GM plants beginning June 29.
UAW President Stephen Yokich vowed Monday that the union would “last one day longer” than GM. “This strike is about not living up to the agreements that they made with the locals across the bargaining table,” Yokich said in a speech to the 2,000 delegates at the UAW’s 32nd constitutional convention.
