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The Grapes Of Wagoner II

Keith Naughton
Monday, January 28, 2008

Driving Towards Disaster

Michigan's woes may soon become familiar to the rest of the country as recession looms.

Newsweek Web Exclusive
Jan 28, 2008 | Updated: 11:33 a.m. ET Jan 28, 2008

Robert Woods went to work in an auto factory straight out of high school and spent nearly three decades making steering gears in Saginaw, Mich. But when his employer, Delphi Corp. went bankrupt in 2005, Woods was downsized out of a job. He didn't get the big buyout bonus other autoworkers received because he didn't have enough seniority. And now, only 48 years old and with three school-aged children, he's finding it hard to make ends meet on his $2,600 monthly pension. The former machinist is looking for work, but there's nothing available that pays like his old factory job. "It's been devastating around here," Woods says. "I don't want to work at McDonald's, but it's just terrible to try to find anything. The American dream has been taken away."

If you want to see what hard times look like, come to Michigan. Last week's manic markets fueled fears that America, or perhaps even the global economy, is tumbling into recession. But Michigan has been an economic wasteland for virtually an entire decade. Its fortunes riding shotgun with America's ailing auto industry, Michigan has lost more than 400,000 manufacturing jobs since 1999. Its unemployment rate, 7.6 percent in December, has been at or near the highest in the nation since 2003. FOR SALE signs dot the landscape, even in the neighborhood of GM chairman Rick Wagoner. But there are few buyers: Foreclosures have quadrupled in the last two years, according to the Web site RealtyTrac.com. The Sunday Detroit Free Press recently printed a 121-page section listing thousands of homes facing foreclosure. And in the last year, 30,500 people have left Michigan, Census officials estimate.

"Michigan is the worst economy in the country, by far," says economist Mark Zandi of Moody's Economy.com. "But the financial pain Michigan is suffering now will become evident in many other parts of the country by this summer."

Indeed, these days Michigan is looking more like the canary in the coalmine, than the isolated "one-state recession" native son Mitt Romney spoke of during his primary victory there. Sure, the auto industry is to blame for Michigan's malaise. (Just last week, Ford, which lost $15.3 billion in the last two years, offered buyouts to all 54,000 of its U.S. factory workers). But many of the factors that drove Detroit into the ditch--$100-a-barrel oil, the credit crisis, globalization--also are preying on the rest of the nation. "That giant sucking sound Ross Perot used to talk about, we are the poster child for that," Michigan Gov. Jennifer Granholm told NEWSWEEK. "But no state will ever be the cheapest place on the planet to do business. What other sectors are you going to see moving away? Every state should be concerned."

But if the rest of the country catches Michigan's cold, things will only get bleaker for the Wolverine State. The faltering economy already has economists predicting that U.S. auto sales will fall to their lowest level in a decade this year. That drop will fall with the hardest thud on Detroit, which still sells too many of the big rigs that guzzle $3-a-gallon gas. American automakers are frantically retooling themselves to produce more gas-sippers and had hoped to finally drive back into the black in 2009. Now that seems overly optimistic. "If the U.S. economy goes into a recession, what happens to us then?" asks Bloomfield Hills, Mich., economist David Sowerby of Loomis Sayles. "We suffer even more. But how much more can you go down?"

Many symptoms of Michigan's malady are already afflicting other parts of the country. California and Nevada also have seen a four-fold increase in foreclosures, according to RealtyTrac. Previously healthy housing markets in the Pacific Northwest and New York are starting to shown signs of weakness, as defaults rise and unsold homes go begging. The primary cause of the calamity is the same everywhere--the subprime mortgage mess has left thousands of homeowners in houses they can't afford and aren't worth as much as they owe on them. (In the car business, that's called being "upside down" on your loan). The difference is that Michigan's real estate market never bubbled up the way it did elsewhere. "It's like we got a hangover, but didn't get to drink the champagne," says Sowerby.

Autoworker Sean Gurskey fell victim to the easy money lure of an adjustable-rate mortgage (ARM) in 2003 to buy his dream home in suburban Detroit. With mortgage payments of just $1,800 and his wife a thriving real estate agent, the Gurskeys decided to take out a $22,000 home equity loan and buy a tanning salon. But then the Michigan economy tanked, the tanning business went belly up and Gurskey's wife went from selling houses to working as a manicurist. Worse yet, his ARM keeps adjusting up. He now pays $2,486 a month on a house that is no longer worth the $245,000 he owes on it. And this summer, the payments could reset to $3,100 a month--more than Gurskey can afford, especially if his job at Chrysler gets cut by the tough new owners, Cerberus Capital Management.

"I worry about this every day," says Gurskey, who has taken to plowing snow for extra money. "You wonder if you'll have a job, if you can make your house payment. I don't want to feel like I've failed my family." It's a feeling the rest of the country could become familiar with soon.
With Joan Raymond and Mary Chapman

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