Impact of DaimlerChrysler's Restructuring on the Delaware Economy

Delaware's manufacturing sector lost 2,600 jobs in May 2006, to hit a trough of 32,000, before rebounding above 33,000 over the last five months of the year. Production adjustments at auto plants were the proximate cause of the fluctuations. Both the state and the Newark area are anxious about the closing of the local Chrysler plant. DaimlerChrysler plans to lay off 700 workers in April 2007 and then another 950 workers in 2009, when the plant is finally shut down.

Looking back, Delaware's manufacturing performance worsened during 2005 as payrolls shrank by 1,300 (or 4%), following a 1,000 (or 3%) decline in 2004. In transportation equipment, employment was volatile throughout 2005, as shifts were idled and then restarted at the state's two auto manufacturing plants. But the crisis in auto manufacturing deepened during 2006 because of the significant sales drops for Chrysler's once very successful SUV Dodge Durango.

By 2006, manufacturing accounted for 7.6% of Delaware's total employment, down from 9.9% as recently as 2000. Manufacturing jobs are heavily concentrated in chemicals (13.4%) and transportation equipment (13.9%). The transportation equipment sector directly employs more than 4,600 workers, and indirectly supports thousands more in other sectors such as recreation, restaurant and catering services, and retail trade.

Fortunately, Delaware boasts a diversified economy, with a major concentration in financial services. Indeed, the state economy grew an impressive 1.6% in 2006, faster than the nation's 1.4% expansion. And this occurred despite a significant loss of about 2,000 financial workers due to MBNA's merger with the Bank of America, along with wider fluctuations in automobile manufacturing due to DaimlerChrysler's restructuring plan.

DaimlerChrysler's decision to shutter its Newark plant will cost the state about 4,000 jobs, including 2,000 in automobile manufacturing and 1,000 more in auto parts supplies, recreation, restaurants, and retail trade. Another 1,000 jobs will be lost due to an induced effect of direct and indirect job losses. If the idled plant is permanently out of production, and if the negative impact is treated as a permanent change, it will cost more than $200 million annually in terms of lost gross state product and more than $250 million annually in lost personal income. While the negative impact is significant, it is not substantial enough to derail Delaware's economic growth. The private services-producing sector will remain buoyant, and help the state maintain above-average growth.

For Newark and the neighboring areas, though, the impact of Chrysler's restructuring plan will be more severe. Indeed, most of the negative impact that we calculated for the state economy will hit directly at the local level.

There is some hope that the automaker may change its mind over the next two-and-a-half years. Chrysler is staying in the SUV business and plans to introduce new models that are more fuel efficient and in line with current market demand. The introduction of new models and an improvement in business conditions may make it feasible for Chrysler to produce some more-popular vehicles at the Newark plant. Furthermore, Newark offers one of the best locations for automobile manufacturing because of its proximity to the huge mid-Atlantic market covering Washington DC, Philadelphia, and New York. Moreover, the Port of Wilmington supports transportation and distribution services, aiding development of the local auto industry; both General Motors and DaimlerChrysler have assembly plants in the Wilmington-Newark area.