Monday, November 16, 2009

Yes, it is good that GM lost less money last quarter than in previous quarters, but it is not necessarily a sign that GM is 'turning its business around'... just as reports that there were fewer layoffs last month than in previous months isn't necessarily a sign that the economy is turning around.

A company that is losing $1 billion is in better shape than a company that is losing $5 billion, just as an economy that is shedding 500,000 jobs a month is in better shape that an economy that is shedding 600,000 jobs a month. But a reduction in the 'burn rate' can't be extrapolated into a projection of profitability in the case of GM or growth in jobs in the case of the economy as a whole.

Let's start with GM: they lost less money due to a combination of expense cuts and a small growth in the number of cars sold. A lot of companies can cut their way to profitability, but GM doesn't have that option as their union contracts limit GM management's ability to keep cutting. Thus, GM profitability is likely to depend on GM selling a lot more cars than it is now.

And that is going to be tough to do. With economies down across the globe, growth in one area will likely be offset with declines elsewhere. Other car companies are going to be competing for the customers that exist. And GM's customer base is going to take a hit due to boycotts over GM getting a bailout and GM slashing brands and dealerships. Add to that GM having a bad reputation in terms of product quality and I don't see where the growth is going to come from that GM needs to be profitable.

As for the economy, getting businesses to step back from the ledge and stop cutting jobs is one thing. But it is a different game altogether to get businesses optimistic enough to go out and start hiring... and hiring is what drives economic growth over the long term.

And what is the prognosis for businesses starting to feel so good about the future that they're going to start hiring? Not good in my mind. The health care reform battle scares businesses, they don't know the extent to which they'll be forced to spend more on their employee's health care... so why hire anyone new until things get sorted out? They also don't see a business friendly Washington, they feel Washington is more likely to pass additional business-unfriendly regulations and tax hikes than anything they feel would be considered pro-growth. They see stimulus money going to state and local governments and not the private sector. They see a White House whose most frequent visitor was a labor leader who wants to make it even easier to organize unions at union-free businesses.

So my guess is that GM is nowhere near becoming long-term profitable... and the economy is nowhere near growing again. Reductions in losses are nice... but they're not growth... and I don't see the foundation for real positive news on either front.