A Double Dip Layoff Economy

A look at the companies which announced layoffs in December and January demonstrates that almost no industry is immune from job losses due to this contracting economy. Tech companies such as Microsoft (MSFT) fired people. So did many retail operations including Macy's (M).Consolidation efforts led by Pfizer's (PFE) marriage to Wyeth (WYE) have begun to put tens of thousands of people out of work. GM (GM) is signaling that it may have to take another 15,000 or 20,000 jobs off its payroll in the next month to convince the federal government that it can become economically viable in a market in which car sales are still falling.

A look at the companies which announced layoffs in December and January demonstrates that almost no industry is immune from job losses due to this contracting economy. Tech companies such as Microsoft (MSFT) fired people. So did many retail operations including Macy's (M). Consolidation efforts led by Pfizer's (PFE) marriage to Wyeth (WYE) have begun to put tens of thousands of people out of work. GM (GM) is signaling that it may have to take another 15,000 or 20,000 jobs off its payroll in the next month to convince the federal government that it can become economically viable in a market in which car sales are still falling. (See pictures of TIME's Wall Street covers.)

Most recessions in the last fifty years have lasted three or four quarters. That meant that as the economy fell apart, companies would make predictions for the upcoming year and expect that financial circumstances would improve. These companies might have gone through one set of deep cuts to offset dropping sales, but, as the expense benefits from those layoffs began to bear fruit, a new recovery started.

This recession has a more terrifying cycle, in part because it could last for years. The unpredictable duration of this downturn magnifies the problem that as workers get pushed out of jobs, they cease being consumers. More firms see their sales fall as the consumer population shrinks. These companies, then, have to fire more employees in the hope that they can drive expenses down fast enough to catch cascading revenues.

The economy is entering a two-layoff cycle. Managements examined their 2009 prospects late last year and prepared layoffs based on their knowledge that the current year would be rough. They made their job reductions based on those assumptions. But, many executives were completely wrong about the length and severity of this recession. It is hard to blame them for this mistake. Even well-regarded economists have had trouble giving reasonable forecasts for what will happen to joblessness, consumer spending, and industrial production over the next two or three months. The distance to any reasonable prediction horizon lessens as the downturn gets worse.

American businesses and the government's recovery programs are up against a high degree of probability that many large companies that have made one set of cuts will now have to make two. At smaller companies that same problem is magnified although it is hard to come by data about their employment practices.

The chances that many firms will have to make a second set of cuts in the third and fourth quarter will be exacerbated by the fact no part of the stimulus package will put a penny into the market before mid-year. The legislation for putting $800 billion or so into the economy may not be signed into law until the end of this month. Most of that money will leach into the soil of the American enterprise system slowly. Almost no one is looking for a turn in GDP before early in 2010.

The next big wave of layoffs will begin in the retail industry where there is still too much store capacity to be supported by a moribund consumer. GM has already signaled its intention to cut additional employees and, based on the rate of the drop in its sales, Chrysler will be forced to eviscerate its employment base further.

The other industries which will lay off employees are the airline, hospitality, and financial sectors.

Real concern will come if the undertow moves to other parts of the economy which have been expected to hold up fairly well. Technology sector firms including Hewlett-Packard (HPQ), IBM (IBM), and Microsoft (MSFT) have cut large numbers of people, although they are still extremely profitable. Another set of broad layoffs among these companies would be extremely bad news. The reaction to increasing unemployment will worsen if job losses spread to the large energy companies and media conglomerates.

In January, the economy lost 600,000 jobs. There is no reason to think that the monthly number will be any smaller between now and the end of April. The biggest concern will be whether the near-term future looks so grim to managements that they will begin another substantial round of cuts as they look at their likely second quarter results. This would indicate that the total job loss for 2009 could move above six million. To economists, that would look like the end of the world.

— Douglas A. McIntyre

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