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General Electric’s Downsizing Reflects the Tough Reality Facing the U.S. Economy

It’s hard to believe that General Electric Company (NYSE:GE), the darling of Wall Street in the 1990s, a company that has been synonymous with American industrial power and the U.S. economy, has inflicted a major blow to its investors.

More than that, in the longer term, GE’s failures represent a microcosm, an example of the difficulties the U.S. economy will face in the next few years.

But before we consider that process, what happened to GE anyway?

A Rare and Deep Dividend Cut

In what is an extremely rare event for a benchmark of the U.S. economy such as GE, the company will now reward investors with a dividend worth as much as $0.01 per share.

Yes, you read that correctly. General Electric investors who were promised a dividend of $0.12 per share a few months ago will now only get $0.01 per share.

Cutting the dividend is the best that new CEO Larry Culp managed to do since taking over in October.

Many readers might wonder what the big deal might be about a corporation cutting its dividend. It happens all the time, after all.

It does, of course. But the drastic dividend cut—literally a tithe—marks the third time that General Electric has cut its dividend since the Great Depression of 1929.

Beware of Investing Because of the Dividend Alone

After GE was ejected from the Dow Jones in June 2018, General Electric investors have had to learn a rather unfortunate lesson: it’s not always wise to invest in companies because of their dividends.

Don’t get me wrong. Dividends are great. But no company can continue to deliver them without an underlying source of income and earnings. Therefore, always pay attention to earnings.

Also, pay even more attention to the behavior of conglomerates like General Electric under duress.

They go on a “diet,” shedding and selling off divisions, often focusing on a handful of key domains, to become competitive again.

Sometimes the highway to competitiveness can run into a few obstacles. For GE, the obstacle was called Alstom SA (EPA:ALO). In 2014, GE acquired the French company’s energy business, which produced some $22.0 billion in losses in the third quarter of 2018.

The Justice Department and the U.S. Securities and Exchange Commission (SEC) have already opened separate investigations into GE’s unusual step.

Many market observers and investors may have ignored the dividend cut.

On Wall Street, GE stock has hit rock bottom. It’s at the lowest level since the financial crisis.

GE Will Survive, But the U.S. Economy Has Changed Radically

Now, I expect GE will survive. It’s a big name and still has productive divisions. But the company does shed light on structural problems that may affect the U.S. economy in the near future.

“GE has to change,” said Culp to investors. Perhaps what he really meant is that the U.S. economy must change. Part of the problem is good-old-fashioned coal.

Trump still believes in this old resource—so-called “clean coal.” And GE also believes in coal, as well as other varieties of energy production.

However, GE faces a “damned if you do, damned if you don’t” paradox. President Donald Trump targeted GE during his presidential campaign in 2016. He accused the company of having shut down plants and shipping jobs to non-union facilities in Texas or Mexico. (Source: “How Erie Went Red: The Economy Sank, and Trump Rose,” The New York Times, November 12, 2016.)

That said, GE and so many other Americans were looking forward to Trump’s infrastructure spending. That was supposed to have boosted GE fortunes.

Now that the midterm elections have produced a gridlock, it appears unlikely that the Democrats in the House will cooperate with Trump’s spending plans.

The House may also obstruct the construction and improvement of coal-fired power plants.

GE is merely one example of Trump’s failed re-industrialization. How long can the job growth numbers improve, many might ask, if industrial giants like GE are cutting and slowing down activities?

What Replaced GE in the Dow Jones Index? 

And it’s not just the dividend. The Dow Jones index expelled GE in June.

It replaced the historic company synonymous with light bulbs and powerful jet engines with Walgreens Boots Alliance Inc (NASDAQ:WBA).

Yes, that’s Walgreens the drug store.

GE may yet survive thanks to specialized divisions—especially its jet engines that propel vehicles, from the “Black Hawk” helicopter to the “Boeing 777.” But while these units generate healthy profits, they are not large-scale employers.

The jobs they offer are highly skilled, often requiring years of education. They are also jobs that were not shipped out overseas in the first place. In other words, GE has little to gain from Trump’s tariffs.

As such it reveals some unpleasant realities about the U.S. economy in the next few years.

The reality is simple, Trump does not have all the answers.

So far, the only thing he’s done is cut taxes. And for most people—the lower and middle classes—the tax cuts won’t last beyond the middle of 2019. More importantly, however, all those jobs that were supposed to come back to America won’t be coming back.

One reason is that the entire nature of the U.S. economy has changed.

Walgreens replacing General Electric as a Dow component represents a glaring example of this phenomenon.

Services Have Taken Over Manufacturing

The service sector has taken over manufacturing. Finance, technology, services, and healthcare (as in the insurance and managerial side, which outnumbers the medical practitioners) have become more relevant to GDP than manufacturing.

GE itself was part of that process. Indeed, as early as the 1980s, General Electric produced more earnings from its monetary and financial divisions than from traditional “making things” activities.

Anyone who has ever watched The David Letterman Show on NBC knows that GE owned the NBC network. In fact, Trump himself knows this well, given that he and NBC worked together on The Apprentice.

And we’re talking about GE, once the world’s largest manufacturing company, making and selling gas turbines, jet engines, light bulbs, airplanes, and appliances of all kinds.

It was GE’s famous and star CEO of the 1990s, Jack Welch, who propelled GE Capital (a finance division to facilitate the purchase of GE related products since the 1930’s) to center stage. GE Capital even sold mortgages.

In fact, GE Capital developed financial interests so large as to rival major banks. Financial services accounted for over 50% of GE earnings in 2007.

Anyone remember 2008?

The next year, the “credit crunch” swallowed up GE Capital’s many businesses and the stock collapsed.

The fact that GE is still around speaks well of the stock, which, while low, has a capacity to emerge. Nevertheless, the GE example also suggests the U.S. economy has changed too much, for better or worse, for it to sustain the millions of high-paying manufacturing jobs Trump has promised.