|Projected job losses—direct, indirect and spin-off—under two contraction scenarios. Click to enlarge. Data: CAR|
Researchers at the Center for Automotive Research (CAR) in Ann Arbor, Michigan, estimated the short-term (1-3 years) impact on the US economy would be substantial were all—or even half—of the three Detroit-based automotive manufacturers’ US facilities to cease operations. CAR has carried out the majority of national level automotive economic contribution studies completed in the United States since 1992.
The immediate impact to the economy would be felt well beyond the Detroit Three companies, negatively impacting the US operations of international manufacturers and suppliers as well. Nearly 3 million jobs—239,341 jobs at the Detroit Three; 973,969 indirect/supplier jobs; and more than 1.7 million spin-off (expenditure-induced) jobs—would be lost in the first year if there is a 100% reduction in Detroit Three US operations, according to the study.
The 100% contraction scenario also results in a reduction of US personal income by more than $150.7 billion in the first year, and generates a total loss of $398.2 billion over the course of three years.
Our model estimates that a complete shutdown of Detroit Three US production would have a major impact on the US economy in terms of lost wages, reductions in social security receipts, personal income taxes paid, and an increase in transfer payments. The government stands to lose on the level of $60 billion in the first year alone, and the three year total is well over $156 billion.—Sean McAlinden, CAR chief economist and the study’s leader
CAR modelled two scenarios: the Detroit Three automakers ceasing all operations in United States (100% contraction scenario); and a 50% reduction in overall Detroit Three employment and production in the US economy, an event that probably would involve a contraction by two of the domestic automakers. The circumstances are such that either of these scenarios is possible, and indeed one or the other is probable, within the next 12 months, according to the study.
The researchers generated the estimates of economic impact through the use of an economic/demographic forecasting and policy simulation model constructed by Regional Economic Models, Inc. (REMI). The model captures three types of employment impacts: direct, indirect and spin-off. The model was calibrated using public and proprietary data on automotive industry employment, wages, price and capacity. Simulations estimating economic impacts on the US economy were run for three years after the assumed initial change in Detroit Three operations.
The contraction scenarios explored in this memo should not be interpreted as representing the economic activity that would be lost if the automotive industry never existed in the United States. The two scenarios represent short-term shocks that would affect all auto producers in the United States and that would be mitigated over time by gradual increases in domestic production by international automakers and surviving Detroit Three capacity.—CAR Research Memorandum
The CAR authors assume in the 100% contraction scenario that not only does domestic production by the Detroit companies fall to zero in the first year, but that domestic production (in the US) by the international producers also falls to zero due to a major wave in supplier bankruptcies (“supplier shock”). The collapse 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%, forcing suppliers to restructure or liquidate, according to the report.
The scale of the contraction of the Detroit Three would overwhelm any attempt by the international producers to keep their existing suppliers in business or to find alternative suppliers, here or elsewhere. US consumers would be forced to rely on only imported vehicles as a source of new vehicle purchases in the first year. However, we do not assume that the international automakers in the US lay off their employees at any time. We also assume that by the third year, the international producers are back at full operational capacity and have expanded to at least take up some of the lost Detroit Three production (20 percent of former Detroit output).
For the second scenario, CAR assumes that Detroit Three production and employment falls by 100% in the first year but recovers to 50% in the second and third years. CAR assumes essentially the same first year supplier crisis for all automakers in the United States, with production by the international automakers falling to about 50% in the first and second years. CAR also assumes that the international producers would recover fully by the third year and that the surviving Detroit companies would restore production to 50% of the former combined level by the second year and maintain this level in the third year.
The 50% scenario results in a first year total employment impact of a loss of nearly 2.5 million jobs in the US economy, comprising 239,341 jobs at the Detroit Three; 795,371 indirect/supplier jobs; and more than 1.4 million spin-off jobs. The employment picture recovers in 2010 (1.5 million lost) and 2011 (1.0 million jobs lost), due to the resumption of US production by the surviving Detroit Three producer and international automakers, and the process of dislocated workers finding new employment.
In economic terms, the 50% cut in Detroit Three US operations would reduce personal income by more than $125.1 billion in the first year, with a total loss of $275.7 billion over the course of three years.
Debate over the shape of a bailout package for the Detroit Three began this week in Congress.