Econwatch
Feb 26, 11:29PM
By Guy Campanile / 18 comments

Fork In The Road

(AP)

General Motors' fourth quarter earnings report is simply breathtaking. Not in a 1960 Corvette kind of way. Think 1961 Corvair.

GM reports losing $9.6 billion at the end of last year. The company lost $30.9 billion for all of 2008. Throw in all of GM's charges and you are looking at a loss of nearly $85 million a day. It's a loss of $3,700 for every vehicle GM sold around the world last year. That's not red ink. That's the Red Sea.

It was no accident that three hours after GM reported its earnings CEO Rick Wagoner and the rest of GM's top management went to the Treasury Department for a meeting with President Obama's Auto Task Force.

"Today's meeting with the presidential task force on autos was just the beginning of the hard work ahead for GM and the president's team," GM said in a statement shortly after the daylong sit-down.

Wagoner has already asked for $16 billion more in government loans to help GM survive what has become the worst crisis in company history.

"They probably need twice that", says John Wolkonowicz of IHS Global Insight. "But if you compare that to what a government financed structured bankruptcy would cost – about $100 billion for GM – it's still cheaper than bankruptcy."

It's not unreasonable to think that sound's like a devil's bargain. But to be fair, GM was gaining some momentum early last year. Granted, the company made bad decisions for years and depended far too long on highly profitable and gas-guzzling SUVs. However, the company was preparing to roll out its strongest product line-up in years. What nobody could predict at GM's Renaissance Center headquarters was the Dark Ages was just around the bend. Within six months, gas prices skyrocketed to $4.00 a gallon, the credit markets had a nervous breakdown and unemployment shot up 2 percent. Unfortunately for GM, the airbags did not deploy.

Can General Motors be a viable business while hemorrhaging billions every week? It's the central question in the Detroit drama. Some analysts believe GM can pull a U-turn if it continues to get government help and at meets least three conditions:

  • First - GM has to make cars people want to buy.

  • Second - GM needs relief from its labor agreements.

  • Third - The economy must begin to improve quickly.

    GM has already made great improvements in vehicle quality and dependability. Most of its vehicles are just as good as Japanese makes. In the upcoming April auto issue, ConsumerReports gives a number of GM cars and SUVs high marks – including the Cadillac STS, the Buick Enclave and the Chevy Malibu. The electric plug-in Chevy Volt sparks the imagination and the new Chevy Camaro pumps the adrenaline. Another year or two of vehicles like them and GM could gain some traction with Generation X and Y.

    GM and the UAW are already deep in negotiations to amend the union's labor contract. The healthcare entitlements in the contract for GM retirees are simply burying the company. It is horrible that UAW members who have dedicated their lives to GM are now being asked to give back valuable benefits. But the reality is the benefits package would be among the first things torn to shreds by a bankruptcy judge. The UAW leadership knows it. The trick will be convincing the membership.

    The third condition that would make GM viable is something beyond their control. Nobody knows how long it will take for the recession to end. The auto industry is on pace to sell 10 million cars and trucks in 2009. Any annual sales rate below 12 million units cannot sustain General Motors, Ford and Chrysler. The most optimistic annual sales estimates the 12 million unit rate is achievable no earlier than 2010.

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    • Feb 26, 11:44AM
    By Sean Alfano / 15 comments

    Unemployment Targeted At 8%

    The unemployment rate for U.S. workers in 2009 will average just over 8 percent in 2009, an Obama administration official announced Thursday.

    The figure, presented by Christina Romer, Chairman of the President's Council of Economic Advisors, differs slightly than the forecast given by the Federal Reserve last week, which projected unemployment to hit between 8.5 and 8.8 percent this year.

    Romer said unemployment will decrease slightly in 2010 — but fall much more rapidly after that and will eventually settle around 5 percent in the following years.

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    Feb 24, 1:44PM
    By Dan Farber / Add Comment

    Bernanke Predicts 2010 Recovery, With Big "Ifs"

    (AP Photo/Lawrence Jackson)
    Prefacing the speech President Obama will deliver tonight, Federal Reserve Chairman Ben Bernanke told a Congressional panel that "there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery."

    His prediction has a few dependencies, however. The various stimulus packages, bailouts and budget cuts must provide stabilization in financial markets and renew consumer confidence in the economy. That's a rather significant dependency, and Bernanke was ultimately cautious in his outlook. "Overall, the downside risks probably outweigh those on the upside," he said. Nonetheless, the Dow perked up 150 points in mid-day trading.

    Here's the full text of his "Semiannual Monetary Policy Report to the Congress" delivered to the Senate Committee on Banking, Housing and Urban Affairs today:

    Chairman Dodd, Senator Shelby, and members of the Committee, I appreciate the opportunity to discuss monetary policy and the economic situation and to present the Federal Reserve's Monetary Policy Report to the Congress.

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    Feb 20, 4:45PM
    By Dan Farber / 23 comments

    Quants And Accounting Majors: Uncle Sam Needs You

    4793929With an overwhelming focus on the resolving economic morass in his first 30 days in office, President Obama has muted his "hope" and "change" mantra and ratcheted up the "transparency" and "accountability" theme. With about $500 billion dollars to be doled out as quickly as possible, $350 million has been set aside to fund accountability for the American people (including $253 million to boost the inspector general corps).

    According to the New York Times, the federal government might have a problem in hiring people who can provide the oversight: "Finding qualified auditors and investigators to supervise such a vast increase in government spending might be a challenge in itself, and some experts on government accountability programs warned that spending more on oversight did not always guarantee better results."

    Indeed, the infrastructure needed to rebuild the U.S. financial infrastructure is shaky and understaffed to handle the rapid distribution and accounting for hundred of billions of dollars.

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    Feb 18, 1:20PM
    By Dan Farber / 4 comments

    Stuffing An Elephant Down A Snake's Throat

    (White House)

    Now that President Obama has rammed through his $787 billion stimulus package -- or American Recovery and Reinvestment Act (ARRA) -- the money needs to doled out, and rather quickly to have the desired effect of resuscitating the U.S. economy.

    However, spending the money may not be so easy. According to a New York Times story, the infrastructure to dispense funding is not in great condition:

    "The once efficient Obama transition has ground to a near standstill after tax problems bedeviled several of his nominees, leaving the top echelon of his government largely unassembled. Three cabinet jobs remain unfilled, only 2 of the 15 cabinet departments have deputy secretaries confirmed, and the vast majority of lower-level political jobs remain vacant.

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