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Transat lant ic Cable
of the state of health of the American economy. A reading above
50 indicates growth; below 50, contraction. Economists said the
higher production at factories augured a stronger economy for
the rest of the year, partially offsetting a nationwide slump in
homebuilding. To meet demand, American manufacturers are
rebuilding their inventories after having reduced them over the
previous months.
“The manufacturing cycle continues to swing higher,” Dean
Maki, chief US economist at Barclays Capital Inc (New York)
told
Bloomberg News
. “This is a sustained improvement that
we expect will continue into the second half. It will be a source
of strength for over-all economic growth.” The faster pace
of expansion in the nation’s factories and utilities indicated
that consumer spending was boosting the confidence of US
manufacturers even as prices for raw materials continued to
climb, although at a more moderate pace.
In the week before the ISM report, the Commerce Department
said American consumers spent more freely in May as their
incomes rose, a sign that high gasoline prices had not dampened
the urge to buy. Brisk spending on big government projects, and
by private builders on commercial construction, compensated
for weakness in the housing sector. Construction spending
rose only 0.9%, but even this gain was the biggest in nearly
18 months. The ISM report was one of several indicating that the
US economy had begun its recovery from a first-quarter slump
generally attributed to belt-tightening by businesses concerned
about weakness in the housing and automotive industries.
From January to March the economy grew at its slowest pace in
more than four years. The good news was, of course, tempered
by concern about inflation, which could curtail spending by
American consumers and reduce their contribution to growth
in the global economy. But a government report on income and
spending, notably the ‘core prices’ paid by US producers for raw
materials, indicated that manufacturing costs were under control
at midyear.
Some regional reports were similarly encouraging. ISM said
that its Chicago-area measure of business activity had held
near a two-year high in June. The Federal Bank of New York
said factories in New York State expanded in June at the
fastest rate in a year, while the Federal Bank of Philadelphia
said that manufacturing in that area had accelerated at the
fastest pace in more than two years.
Automotive
Daimler sheds Chrysler
in a very expensive divorce
Dieter Zetsche, chief executive of DaimlerChrysler AG, seemed to
enjoy his star turn as ‘Doctor Z’ in a series of droll TV commercials
for Chrysler products which aired in the US and Canada last
year. But an interview with Mr Zetsche published 25
th
June
in the German daily
Tagesspiegel
suggests he is happy to be
laying down his American burden to focus entirely on the newly
unbound and all-German Daimler AG.
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DaimlerChrysler agreed in May to sell 80.1% of its stake in
the ailing Chrysler unit to the private equity investment firm
Cerberus Capital Management for $7.4 billion, freeing Daimler to
concentrate on its luxury Mercedes brand and its truck business.
Mr Zetsche noted in June that the risk of ‘unwanted’ outside
influence on Daimler had significantly diminished, and that
its market value had already doubled. The company, its single-
minded CEO asserted, is therefore ‘no longer a sausage that
would be worth snatching at for financial investors.’
Either ‘Doctor Z’ had forgotten his relief on learning that financial
investors had snatched at Daimler’s US sausage; or, more likely,
he prefers not to think about that aspect of the most expensive
merger in automotive industry history, and one of the least
successful. If so, his financial department can be counted on to
remind him of the high price of his deliverance from the Chrysler
unit for which Daimler paid $37 billion nine years before.
Chris Isidore, senior writer for
CNNMoney.com
, noted at the time
of the sale to Cerberus that the German auto maker will not
even get most of the money that is paid for Chrysler. Instead,
Cerberus will contribute $5 billion to the auto operations it will
now control, with just over another $1 billion going to Chrysler’s
finance arm. (‘Daimler Pays to Dump Chrysler,’ 14
th
May)
Mr Isidore wrote: “While Daimler will receive the remaining
$1.4 billion of the Cerberus capital contribution to the sale,
Daimler expects to have to cover another $1.6 billion in
Chrysler losses before the deal closes. So Daimler estimates
that it will end up paying out about $650 million to close
the deal, and that its earnings for 2007 will take a $4 billion to
$5.4 billion profit hit due to charges related to the transaction.”
Does Daimler come away with anything, besides its roughly
20% stake in the newly independent and debt-free auto
maker Chrysler Holding? It does, indeed. Whatever lies
ahead for Daimler under Mr Zetsche, it is closing the door on
ongoing losses and liability for future health care costs for
Chrysler’s unionised employees and retirees – estimated as high
as $18 billion.
Mr Isidore pointed out that Cerberus’s purchase of the
Chrysler stake is not its first entry into the troubled US auto
industry. Last year it bought a 51% stake in GMAC, the
finance unit of General Motors; and it is in negotiations to
become a major investor in Delphi, the world’s No 1 auto
parts maker, which has been in bankruptcy since October
2005.
“We are aware that Chrysler faces significant challenges, but
we are confident that they can and will be overcome,” said
John Snow, the chairman of Cerberus, who was US Treasury
Secretary from 2003 to 2006. “A private investment firm like
Cerberus will provide management with the opportunity to
focus on their long-term plans rather than the pressures of
short-term earnings expectations.”
That is one view of the private equity sector which has
become a major force in the acquisition of publicly owned
companies in the US, often buying troubled operations at
a bargain price and turning them around for quick resale at
a profit. Cerberus did not disclose any long-term plans for
Chrysler, should it return to profitability.
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