For more information on this topic, see our interview with Patrick Anderson in this issue.

The greatest threat to the American economy is now the fragile state of the automobile industry, particularly General Motors. 

A recent study by the Center for Automotive Research suggests that a 50% contraction of the US Big Three manufacturers would result in an immediate loss of 2.5 million jobs, assuming the balance does not get picked up by foreign companies.  Of these, “only” 239,000 would come from the auto companies themselves, with the rest coming from suppliers and businesses affected by the reduced spending of those employees who were laid off.  Such massive job loss would push the unemployment rate from 6.5% to approximately 10.5% and cause a $125 billion decline in personal income, reducing the GDP by 1%.

Before you jump to the conclusion that such forecasts are industry and union hyperbole, keep in mind that other surveys suggest that up to 90% of consumers would not buy from a bankrupt automaker.  A substantial contraction of GM – a scenario that is all but inevitable – would have damaging repercussions throughout GM’s supplier chain and dealer network.

One of the lessons of the credit crisis is that systemic failures have effects that are more severe and unfold more rapidly than we tend to anticipate.  GM will have less than $5 billion in cash by late December and this cash level “could be overwhelmed by payables coming due in early January,” according to Rod Lache of Deutsche Bank.  GM is on the brink, and, although Ford and Chrysler may be in better shape, GM’s failure could make Lehman’s bankruptcy seem like a hiccup.

Leaving aside the “bailout versus bankruptcy” debate, it is a different, very specific question that will determine the ultimate fate of GM: What will it take for GM to break-even in the current low-demand environment?

This is the same question lawmakers asked the auto executives in Washington this week before sending them back to Detroit with two weeks to find an answer.  We don’t know what the rescue plan will ultimately look like, but Lache’s analysis allows us to paint a general picture.

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