Mounting Layoffs: Why They're Different This Time
Thousands are losing their jobs at Merck. Thousands more are being cut at Xerox, Yahoo, Chrysler and General Motors.
Those companies were in the news just this week, and they weren't alone. Corporate America is now following the lead of Wall Street, where tens of thousands have lost jobs, many of which will never return. The question, though, is this: As the layoffs add up, how bad will unemployment be in this recession? And what does that mean in terms of when and how the economy will recover?
It really is a different job market this time, and that might be a slight positive for workers, economists say. For one, there was no big ramp-up of new employees ahead of this economic downturn. But there are plenty of other factors that make this job environment more worrisome. One of those issues is the fact that there's no turnaround in sight for housing, which can only aggravate job losses.
"You have a very broad-based decline in payrolls. The only good thing is that businesses did not seem to have aggressively hired during the boom. It never got to the point where there was hiring in advance or panic hiring," said Mark Zandi, chief economist at Moody's Economy.com. That contrasts to the period prior to the dot-com bust, when companies were luring workers to internet companies with signing bonuses.
"The other unique feature of this is how broad-based these job cuts are. In other times, they were focused in a region or two," he said. "By our calculation, there are 27 states in recession. Fifteen are close. It's a much broader downturn than has been the case historically. That's an issue to how these economies can adjust to all of these shocks."
Typically, people have picked up and moved to another part of the country when times have gotten tough. Not this time, Zandi said. "There's really no place to go. The only big economy that's doing well is Texas. Of course, the fact that so many homeowners are underwater cuts down mobility," he said. He said the phenomena could prolong the recession.
So far, 3/4 of a million jobs have been lost since the beginning of the year, Zandi said. "It feels like, given the announcements, given the collapse of business confidence, we're not halfway done. At least 1.5 million to 2 million jobs will be cut in total," he said. He expects unemployment to peak at 8 percent by the end of 2009 or early 2010.
The auto industry's jobs losses have already amounted to about 100,000 in the last three years and could accelerate. Merger talks between General Motors and Chrysler have intensified, and a merger of the two reportedly could result in another 30,000 to 40,000 job cuts at the combined company. But without the merger, a failure of an auto maker could have an even bigger impact as it ripples through related industries and the economy.
"The auto sector is about 3 percent of GDP. It's roughly about $450 billion," said Deutsche Bank chief U.S. economist Joseph LaVorgna. "That's the direct effect. The indirect effect is quite large."
Diane Swonk, chief economist at Mesirow Financial, expects unemployment to reach 7.5 percent by the end of next year, and 6.5 percent by the end of this year. It's currently at 6.1 percent.
The industries currently adding jobs are health care, educational services and, to a lesser extent, defense, said Zandi. Big job losses have come in financial services and construction. "It feels like the next six months are going to be very bad with very layoffs," he said. "It won't be until 2010 when we find our footing."
Swonk said one of the fundamental changes in the job market now is that companies have "real-time" workforces. "We've seen a major change in events in terms of responsiveness of firms...Even before we were in a recession, we were laying people off. That didn't used to happen," Swonk said.
Like Zandi, she pointed to the fact that companies didn't add lots of new workers going into the downturn. She said wages are more "market-adjustable" than in the past. For instance, companies can change their labor costs by changing healthcare plan contributions, or shifting hourly workers to salary. That might save head count. "You don't have to cut workers to cut your wage burden," she said.
Another factor is the move by companies to have just-in-time inventories. In past recessions, companies slashed workers when inventories piled up. In this recession, for the most part there is no inventory issue.
"There have been some major structural changes in the way large-scale employers respond to the economy," Swonk said. As a result, small businesses make up a bigger part of the work force than they used to, and they had been bigger drivers of new job growth.
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Swonk also pointed to another factor that has significantly affected the job market: the constriction of credit.
"The insult to injury is you see Mervyn's going under; Sears is closing stores: Circuit City is closing stores. Usually where there is this situation, [such as] in the 1990s, it took the recession several years to show up in widespread bankruptcies at stores. Now we're seeing it accelerate."
"Credit in the past has always been a stabilizer in weak economic times. Now it's not there. It's an accelerator...This is really highly unusual how rapidly the economy is deteriorating right beneath our feet," she said.
Retail jobs typically get a seasonal lift during the holiday shopping season. "The economy has been weak for some time. That said, it is unusual to see this many retailers going bust before Christmas, and you know the credit crunch was an accelerant there," Swonk said.
Job cuts announced over the past several days (source: Reuters, with CNBC staff):
- Privately held Chrysler said it was cutting about 5,000 salaried employees. Earlier in the week, it said was slashing 1,825 jobs as the result of plant closings.
- Goldman Sachs plans to cut 10 percent of its staff, or almost 3,300 jobs after laying off hundreds of support staff and junior bankers in June.
- Money manager Janus Capital said it would cut 9 percent of its staff a day after rival AllianceBernstein said it would make unprecedented job cuts.
- Xerox announced job cuts of 5 percent, or 3,000 positions, due to a "tough business environment."
- Mining equipment maker Terex said it would lay off hundreds of workers and suspend its share buyback program to preserve cash.
- Starwood Hotels & Resorts Worldwide said it plans to cut an unspecified number of jobs to offset slowing travel demand.
- United Parcel Service sees layoffs in 2009 as customers need less shipping due to cutbacks on holiday gift purchases.
- Computer systems vendor Agilysys cut three senior management positions and is consolidating headquarters in Ohio.
- Merck announced plans on Wednesday to cut 12 percent of its workforce, citing a need to change its business model in order to survive.
- Fidelity National Financial , which controls one of the largest U.S. title insurers, announced 1,000 job cuts, office closings, a 10 percent pay cut and a 50 percent dividend cut
- Biotechnology company Maxygen plans to cut nearly 30 percent of its workforce and explore strategic options due to the current financial environment
- Popular Inc. , parent of Banco Popular, is cutting 600 positions and more than a quarter of its branches in the United States.
- General Motors , which previously said it would reduce salaried employment costs by 20 percent, reportedly plans more layoffs than expected in its salaried and contract workforce. GM also said it is reducing some employee benefits, including 401 k contributions and other programs.