Saturday, March 7, 2009

Two Giants In Trouble

This is a General Electric Dash 9 locomotive that is being operated by the Burlington Northern Sante Fe Railroad. Railroad locomotives are one of the many different products that GE produces. Until recently, General Motors produced all the other locomotives manufactured in North America.

Image credit: Morven/Wikimedia Commons

Before I get onto the main topic of this article, here's some related news from this week, as summarized by FireDogLake diarist eCAHNomics :

The February employment data continued the labor market disaster. The headline unemployment rate jumped to 8.1%, from 7.6% the month before and the highest rate since December 1983, over 25 years ago. Payrolls plunged 651,000, and the prior two months were revised downward. Job losses during 2008 were 3.0 million, the largest for any year in the post-WWII period. But by shifting the period by just two months, to February 2009 versus February 2008, employment plummeted 4.4 million.

Employment Update - February 2009 Data

eCAHNomics has been writing excellent summaries of employment data the last few months. I recommend that you check out her diaries on the first Friday of each month.

The best news I can tease out of this data is that at least the rate of job loss is no longer accelerating. It's been about 600k for each of the last three months. That's not very good news when we're shedding more than half a million jobs at a time. Of course, as I've pointed out before, we also need to add more than 100k jobs per month just to keep up with population growth. If this rate of job loss continues, we will have fallen almost an additional ten million jobs behind by the end of this year. As eCAHNomics points out, we were already in rather bad shape:

The most comprehensive rate for labor underutilization is called U-6 (see original diary for the definition). It leaped to 14.8% in February from 13.9% in January and 9.0% a year earlier. That compares to a headline unemployment rate of 8.1% from 4.8% the year before. The February U-6 set another new high. (The Bureau of Labor Statistics started reporting this measure in January 1994, when it was 11.8%, whereas most of the other data go back to 1948. See Table 2.) If the regular unemployment rate reaches double-digits, as is widely forecast, U-6 will be close to 20%.

Employment Update - February 2009 Data

[link from original]

Thankfully, most economists predict that things will get better toward the end of this year. If that is in fact the case, we will still have to create a lot of new jobs in the next few years to reach employment levels that we last saw in the Clinton Administration. Something like five or six times the number of jobs that were created in the entire Bush Administration is about what it will take.

Onto the subject at hand. Two of the giants of American industry appear to be in lots of trouble. In a report released Thursday, independent accountants stated their conclusion that General Motors may not be a viable entity:

General Motors Corp.’s auditors have raised “substantial doubt” about the troubled automaker’s ability to continue operations, and the company said it may have to seek bankruptcy protection if it can’t execute a huge restructuring plan.


“The corporation’s recurring losses from operations, stockholders’ deficit, and inability to generate sufficient cash flow to meet its obligations and sustain its operations raise substantial doubt about its ability to continue as a going concern,” auditors for the accounting firm Deloitte & Touche LLP wrote in the report.

Concerns Raised That GM Will Not Survive

"Inability to generate sufficient cash flow" should be taken as meaning that GM's credit is none to good at the moment. Any manufacturing business will have cyclical cash flow issues. While times are tough, or when new products are being readied for market, a business will probably not have enough cash to operate. During those periods, loans are required to handle those expenses. As we've learned, loans aren't widely available right now. Nothing about this report will help that situation.

GM is mostly about automobiles. Its major subsidiaries include other automobile producers like Pontiac and Hummer, the auto parts producer AC Delco, and GMAC, the auto loan company. Perhaps its most diverse holding of any size was the Electro-Motive Divsion, now Electro-Motive Diesel, (EMD), which builds railroad locomotives. It was sold off in 2005. According to its 2008 SEC form 10-K (pg. 19), GM employs approximately 91,000 people within the U.S., 25,000 in the rest of North America, and just under 130,000 more around the world.

As part of the recovery plan it submitted to the government, GM is planning on selling off several of its divisions, including Hummer, Saab, and Saturn. It is also considering selling off its AC Delco division.

Two weeks ago, Business Week published a scathing review of the GM recovery plan:

GM is basing its speedy payback plan on the assumption that Americans will ramp up their car-buying rate to 18.3 million annually by 2014. That's 500,000 more than they bought in 2000 when sales hit an all-time high. Back then, the economy was strong and automakers handed out cheap loans to just about anyone with a driver's license. Such conditions are unlikely to arise again soon. This year automakers will be lucky to sell 11 million vehicles in the U.S., and Chrysler, in its own plan, figures overall sales will not exceed 13 million in 2014. If that's the case, according to GM's own calculations, it won't have paid off taxpayers in five years. Rather, it will have to borrow more and owe taxpayers $30 billion.

GM's Dicey Recovery Plan

It's axiomatic that GM will need more help than it has received so far. In contrast to the giveaways banks are receiving, though, the help that GM and Chrysler are receiving from the government is in low interest loans.

Some divisions are seeing increased business already, thanks partly to lower oil prices. The Baltimore plant, which makes truck transmissions, avoided layoffs recently thanks to increased sales. That plant was converted to be "landfill free" in 2007. GM stated in their 2008 SEC form 10-K (pg. 14) that they intend to convert half their facilities to be landfill free by 2010.

Eventually, the money will be repaid to taxpayers, assuming the corporations survive. I feel no such assurance in the case of the trillions of dollars we've poured into the financial industry of late. Think about that next time someone complains about "handouts" to auto workers. Thirty billion dollars seems like a pittance in comparison.

The other giant that is in trouble, it would seem, is General Electric. Joe Nocera summarizes:

[T]he truth is, nobody knows for sure whether G.E. is in trouble — not even the bears who are shouting it from the rafters. G.E.’s numbers are the proverbial enigma wrapped inside a riddle. If it wants to end the storm swirling around it, the company is going to have to offer the kind of detailed disclosure of the portfolio of assets carried on the books of G.E. Capital. As it happens, that is precisely what the company says it will do the week of March 16.

Is General Electric Next?

GE is an even larger company than GM. As most folks know, it produces light bulbs. This was the foundation of its business. In the last century, GE has become the epitome of a diversified corporation. It has divisions that produce medical equipment, jet engines, TV programs and movies and, yes, railroad locomotives.

According to its 2007 SEC form 10-K, GE employs 155,000 people in the United States, and 172,000 elsewhere around the world.

As Nocera notes, it's too soon to say just how much trouble GE is actually in, but it definitely faces some of the same problems GM has. It too, has cyclical expenses, at least within its various divisions. It cannot function without at least occasional financing. According to a press release on Thursday, though, it has no unmet capital needs:

GE CFO Keith Sherin said today that the Company has taken the right steps to ensure that it is safe and secure in this environment and that he sees no need to raise additional capital. Mr. Sherin said GE’s financial services business expects to be profitable in the first quarter of 2009 and for the full year, and the Company will provide a detailed review of the financial services business the week of March 16 in a dedicated GE Capital meeting.

“We have taken a number of actions to make the Company stronger and safer. These actions have given us an incredibly strong liquidity position, including $45 billion in cash," Sherin said. “We have no triggers that we can see that would have any call on our cash in the short-term; and we have $60 billion of additional capacity available under the Temporary Loan Guarantee Program (TLGP). We've done 70% of the long-term debt we need for this year, and we're going to complete the remainder of 2009's funding needs in the near future. We have the capacity under TLGP to complete 2010's funding needs as well.

GE CFO Keith Sherin says Company is Safe and Secure and Sees No Need for New Capital

Assuming that's true, then the problems that Nocera's informants are referring to must lie elsewhere. Given the eclectic nature of GE's products, unless it's something to do with GE's own financial division it's hard to imagine what those problems might be.

These are two of America's leading manufacturing companies. They employ hundreds of thousands of Americans, Canadians, and Mexicans in high-paying jobs. In addition, they purchase parts and manufacturing tools and facilities from hundreds of thousands of other North Americans. If they are allowed to go under, we can expect our economy to get worse for a long time before it gets better.

UPDATE (March 8): Over at the FireDogLake edition of this article, commenter ubetchaiam pointed to this as a possible explanation for GE's troubles:

March 6 (Bloomberg) -- General Electric Co. Chief Executive Officer Jeffrey Immelt is paying the price for his investments in commercial real estate and U.K. property debt.

Profit at GE Real Estate dropped by $1.1 billion last year, according to the annual report from the parent company’s GE Capital finance arm. Fairfield, Connecticut-based General Electric’s real estate earnings are likely to fall further as occupancies and rents drop in a U.S. recession that’s now in its second year, said James S. Corl, who oversees distressed real estate investments at Siguler Guff & Co. in New York.

“They spent a huge amount of money in real estate,” Corl said. “They paid a full price for what ends up being a lot of mediocre real estate.”

General Electric Pays Price for Real Estate, Debt Investments

While this certainly is a cause for its stock price to decline, I don't see why this would be a major crisis for GE. It may end up being a crisis for certain portions of GE's management, particularly those who made or supported the decision to go so heavily into commercial real estate and debt instruments. In retrospect, neither was a good idea. Commercial real estate accounted for much of the losses identified earlier this year that RGE Monitor identified.


Dana Hunter said...

Well, as you said... at least we're staying steady at -600,000 jobs per month...

Crap in a hat.

Cujo359 said...

When that's the good news, the rest of the news must be pretty bad...