Chrysler Bankruptcy May Not Dent Economy as Cutbacks Were Set

(Bloomberg) -- Chrysler LLC’s bankruptcy may not rattle the U.S. economy even as the automaker idles all assembly plants for at least 30 days while it reorganizes.

Though the decision will reduce workers’ earnings and force suppliers to reduce or halt operations, Chrysler probably would have had to shut down temporarily anyway, said Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania.

“There’s no economic difference between Chapter 11 and the restructuring they would have done outside of bankruptcy,” Zandi said in an interview. “Chrysler, its employees, dealerships, and suppliers are going to end up in the same place whether they go through bankruptcy or not.”

Chrysler, which filed for the fifth-biggest U.S. bankruptcy last week, already had been reducing payroll and closing factories because of the industry’s slump. The third-largest U.S. automaker now will combine with Fiat SpA, a move that will require a retooling of manufacturing processes and products that probably was also inevitable, according to Zandi.

Zandi estimates a one-month shutdown of Auburn Hills, Michigan-based Chrysler’s assembly lines would idle about 45,000 workers at the company and its suppliers. That would result in about $7.5 billion in lost output, which would shave about 0.02 percent from 2009 growth.

Not Like 1970

That’s a minor dent compared with what happened in a similar period in 1970, when the U.S. was also in recession and General Motors Corp. was hit by a 67-day nationwide strike. GDP fell 4.2 percent in the fourth quarter of that year, following the walkout.

A bankruptcy at GM, which faces a June 1 U.S. deadline to prove it can survive without a court restructuring, would probably take a more severe toll on the economy. GM sold twice as many new cars and trucks in the U.S. last year as Chrysler, and had almost 5 times as many employees worldwide.

Auto production makes a much smaller contribution to GDP now than it did three decades ago. Car, truck and parts manufacturing accounted for 0.7 percent of value-added to U.S. gross domestic product in 2007, the last year for which figures were available. Durable goods manufacturing, which includes autos, accounted for 13.4 percent of GDP in 1970, and made up 6.4 percent in 2008.

GDP declined 6.1 percent January through March, in part because inventories fell $103.7 billion. Analysts surveyed by Bloomberg before the Chrysler announcement forecast output to fall 2 percent in the current quarter.

Up to Court

The effects of Chrysler’s bankruptcy would slightly more than double if the shutdown went on for two months, and increase proportionately if a resumption in production were delayed, Zandi said. It may be hard to disentangle Chrysler’s impact from GM’s previously announced plans to idle 13 U.S. assembly plants from mid-May into July to pare inventory.

“A lot in terms of the economic implications is going to depend on whether the court requires an adjustment at different speed than what it was before,” said Mike Montgomery at IHS Global Insight, an economic consulting firm in Lexington, Massachusetts. “The production level over the next six months was expected to be so lean to clean up the inventories that the bankruptcy considerations aren’t as important.”

For parts producers, Chrysler’s production line halt will likely mean “chaos,” said Jim Gillette, director of supplier analysis for CSM Worldwide, a consulting firm in Grand Rapids, Michigan.

Chrysler has more than 150 major suppliers, he said, many of whom do work for other auto companies as well. As part of the bankruptcy, the administration is providing $1.5 billion to Chrysler’s suppliers, including Magna International Inc.,BorgWarner Inc., Visteon Corp., Denso Corp. and American Axle & Manufacturing Holdings Inc., to help prevent halts in production as the company reorganizes.

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