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consumer surveys suggest that between 80% and 90% of prospective customers ... Every $1 billion reduction in vehicle and parts purchases during 2008 by ...

Economic & Workforce Brief Information You Can Use About Pennsylvania Economic & Workforce Development

Forecast of the Economic Impact of Purchases of Vehicles & Parts by Pennsylvania Households, 2008

December 4, 2008

Late 2008 finds the U.S. motor vehicle market troubled. According to an article published in The Economist,1 “North American vehicle sales are running at their lowest levels since the early 1980s, when the population contained 50 million fewer people.” The number of domestic and imported cars and light trucks sold in the United States posted a 34.5% decline between October 2007 and October 2008.2 Tight credit is estimated to have cost American carmakers 20,000 vehicle sales in August 2008 alone that were worth $1 billion in revenue.3 Research reported in this Economic & Workforce Brief was prepared by Penn State’s Workforce Education and Development Initiative (WEDI), an alliance between Penn State Outreach and Penn State’s College of Education. This Brief results from analysis of Pennsylvania economic and workforce opportunities and issues conducted by the Center for Regional Economic and Workforce Analysis in Penn State Outreach in collaboration with the Institute for Research in Training and Development, a research unit in Penn State’s College of Education. To download published Brief reports or to order a Brief, navigate to: http://PSUBrief. notlong.com. Contact the staff of the Penn State WEDI at [email protected]u,edu, 814.865.9919 (voice), or 814.865.3589 (fax) for information about additional services available to help plan and evaluate economic and workforce development in the Commonwealth and beyond. Information on the web about the work of the Penn State WEDI is available at: http://PennStateWED.notlong.com.

Preliminary estimates reveal that seasonally adjusted U.S. employment in motor vehicle and parts manufacturing decreased by 13.5% between October 2007 and October 2008.4 Declining vehicle and parts manufacturing employment also affects jobs at companies that supply parts, materials and services and at businesses where employees of vehicle and parts manufacturers and their suppliers spend their money. Every job lost in vehicle and parts manufacturing could result in the loss of seven jobs economy-wide.5 Not surprisingly, at the other end of the vehicle production–to–sales chain, the number of motor vehicle and parts dealerships with layoffs resulting in at least 50 new unemployment insurance claims more than doubled between September and October 2008.6 In early November, General Motors disclosed that it could run out of cash by the end of 2008. Cerebus Capital Management, a private equity firm that owns 80% of Chrysler, has failed in attempts to sell some or all of Chrysler. Profit and operating margins, return on assets, and revenue growth declined in the third quarter of 2008 for Ford Motor Company. Chapter 11 bankruptcy is an option for major auto companies, but consumer surveys suggest that between 80% and 90% of prospective customers would abandon the products of a carmaker that filed for bankruptcy protection.7 The spectre of further heavy job losses by carmakers and their suppliers—and the attendant economic fallout that this disruption would create—has lead to pleas by auto industry executives for bridge loans from the federal government as carmakers struggle to remain viable business entities. How sensitive is the Pennsylvania economy to the performance, risks, and uncertainties of the consumer market for vehicle and vehicle parts? To answer this question, Penn State’s WED Initiative applied the Pennsylvania REMI Policy Insight Model8 to forecast and benchmark the economic impact of every $1 billion in vehicle and parts purchases by Pennsylvania households during 2008. The Model forecasts sales of $24 billion dollars of 2008 vehicle and parts sales in Pennsylvania, 56% of which represented vehicles and parts imported from outside Pennsylvania, 37% imported from outside the United States, and 7% from Pennsylvania itself. Purchases of vehicles and parts includes expenditures on new and used autos and on tires, tubes, and parts. Every $1 billion reduction in vehicle and parts purchases during 2008 by Pennsylvania households is anticipated to have the following impacts: • • • •

Jobs9—Reduction of 6,434 total jobs, 6,365 of which are in the private nonfarm sector. Wholesale and retail industries bear 70% of all private nonfarm job losses, with the bulk of the remainder of reductions in industries offering professional and technical service, health care and social assistance, and accommodation and food service. Gross State Product10—Reduced by $482 million due to lower business–to–business purchases, consumer spending, government purchases of goods and services, and investment in residential and non–residential structures and capital equipment. Real Disposable Personal Income11—Reduced by $176 million due to job losses. Population12—Reduced by 1,270 persons. Population loss occurs because people migrate out of Pennsylvania due to reductions in the chances of finding a job and in income opportunities following the reduction in vehicle and parts purchases by households.

Pennsylvania households in the lowest 20% of the income distribution are two to four times more likely to bear reductions in jobs and income than households in the upper 20%.

1 American carmakers: On the edge. The Economist, November 13, 2008 (http://www.economist.com/business/displaystory.cfm?story_id=12601839, ¶3). 2 http://wardsauto.com/keydata/USSalesSummary0811/. 3 America’s car industry: A bail–out that passed. The Economist, October 2, 2008 (http://www.economist.com/business/displaystory.cfm?story_id=12341970, ¶1). 4 http://www.bls.gov/bls/auto.htm. 5 http://auto-multiplier.notlong.com. 6 http://data.bls.gov/cgi-bin/print.pl/iag/tgs/iag441.htm. 7 American carmakers: On the edge. The Economist, November 13, 2008 (http://www.economist.com/business/displaystory.cfm?story_id=12601839, ¶7). 8 See http://www.remi.com. 9 Number of jobs, full-time plus part-time, by place of work. Full-time and part-time jobs are counted at equal weight. Employees, sole proprietors, and active

partners are included, but unpaid family workers and volunteers are not included. 10Dollar value of goods and services sold for personal consumption, government purchases, investment, inventory, and exports net of imports.  11 Personal income derived from all sources minus personal taxes and adjusted by the personal consumption price index. Personal Income is the income that is received by all persons from all sources and is calculated as the sum of wage and salary disbursements, supplements to wages and salaries, proprietors’ income with inventory valuation and capital consumption adjustments, rental income of persons with capital consumption adjustment, personal dividend income, personal interest income, and personal current transfer receipts, less contributions for government social insurance. 12 Mid-year estimate of the number of persons, including survivors from the previous year, births, special populations (prisoners, military and dependents, and college students), and migrants (economic, international, and retirement).

This Economic & Workforce Brief is provided by Penn State’s Workforce Education & Development Initiative (http://PennStateWED.notlong.com). For more information about this analysis of the impact of Pennsylvania consumer expenditures on vehicles and parts on the Pennsylvania economy, contact Rose M. Baker ([email protected]) or David L. Passmore ([email protected]) at 814.865.9919. A companion report (http://PA-AutoSales.notlong.com) examines the impact of employment in Pennsylvania vehicle and parts dealerships on jobs, employment compensation, and property taxes.