MSN Money Central, June 1, 2009, Monday

MSN Money Central

June 1, 2009, Monday

MSN Money Central

The real damage from GM bankruptcy: Layoffs

General Motors' (GM) long-anticipated bankruptcy announcement on Monday didn't send investors running from the markets. If anything, they responded with relief to the news that GM would file for Chapter 11. The Dow actually rose 221 points as the storied automaker wiped out shareholders and erased much of the $172 billion it owed creditors.

But GM's bankruptcy could yet send the rallying market into reverse.

Though the $30 billion in taxpayer money granted by the Obama administration saved GM from liquidation, it didn't solve the automaker's two main problems: too much production, too few buyers. To address those, GM will lay off tens of thousands of employees in the next 30 to 60 days and cause hundreds of thousands more to lose their jobs. Those layoffs, in turn, will likely fuel increases in weekly unemployment claims -- dragging down the economy and potentially delaying any 2009 recovery.

"There is a big potential hit to the economy," says Art Wheaton, an industry labor expert at Cornell University. "A typical assembly plant has a multiplier effect of 10 jobs . . . a lot of these folks are going to go immediately to the state unemployment line."

As many as 1.3 million jobs could be lost this year related to GM and Chrysler's bankruptcy restructuring effort, according to the Center for Automotive Research. Some of those would stem from plant closings. Many more would result from GM and Chrysler slashing the number of their dealerships and cutting production, leading to fewer sales for parts suppliers and manufacturers.

In a news conference following the bankruptcy filing, CEO Fritz Henderson said GM would lay off nearly 15% of its salaried North American work force, more than 10,000 people, in the next two months. It will also close another 2,100 dealerships, likely eliminating more than 100,000 jobs in the process, says Wheaton.

"We will close more plants and reduce hours," Henderson said.

The new, leaner GM will have about 40,000 hourly employees by 2010, Henderson said. That's about 21,000 fewer hourly employees than GM had at the end of 2008.

Chrysler's restructuring efforts will also pile ex-workers and dealership employees onto the unemployment rolls. Chrysler is eliminating nearly 790 dealerships in advance of a June 9 deadline. Those dealerships employ about 40,000 people.

President Obama has acknowledged that GM's bankruptcy -- though better than worst-case scenarios for the company, its employees and taxpayers -- will swell the ranks of the unemployed.

"Building a leaner GM will come at a cost," Obama said. "It will take a painful toll on many Americans who have relied on General Motors throughout the generations."

Speaking directly to the Americans who rely on the auto industry for a paycheck, he added:

"I know you have already seen more than your fair share of hard times. I will not pretend the hard times are over. Difficult days lie ahead. More jobs will be lost. More plants will close. More dealerships will shut their doors and so will many parts suppliers."

Investors know the layoffs are coming, as sure as they knew that GM and Chrysler were heading for Chapter 11. What's less clear is whether investors have truly factored in how the rise in joblessness will impact the broader economy and the eventual recovery.

Recently, many investors have bought stock on signs that the worst is over. They have pinned their hopes on positive trends such as declines in weekly unemployment claims. Just last week, the market rose after the U.S. Labor Department announced that initial unemployment claims fell for the second straight week -- dropping 13,000 to 623,000.

The impact of GM and Chrysler's restructuring efforts on the job market could reverse that trend. Such a negative turn around could spook investors, driving them from the market.