Market Insider

Layoffs May Worsen if Economic Growth Doesn't Pick Up

Thousands of layoffs were announced in just the past week, and that trend could continue if economic growth does not start to pick up speed.

Merck on Friday became the latest company to announce a new round of job cuts, saying it would trim 13,000 employeesfrom its work force of 91,000 by 2015. It joins HSBC, which is reported to be trimming 10,000 jobs from its global staff, and Borders, letting go another 10,700 workers, as it shuts down all of its retail stores.

"These heavy cuts are a sign the economy is stalling. The GDP numbers back it up. This is a concrete result of what you get when you see GDP stalling under 2 percent, like we've seen for two consecutive quarters," said John Challenger, CEO of Challenger Gray and Christmas, which monitors layoffs.

"It's across the board industries. It's not like the auto sector or something doing poorly. We are seeing pharmaceuticals; defense; retailers - in terms of Borders; and financial firms - in terms of Goldman..It's so very broad-based and it certainly poses a risk to the economy turning around, as people lose their jobs, and a lot of consumers who support these companies lose their jobs," he said.

Friday's report of first and second quarter GDP drove home the sluggish state of the U.S. economy and provides a backdrop for a 9.2 percent unemployment rate and the string of poor jobs reports in the past several months. The second quarter grew at a 1.3 percent pace, well below the 1.8 percent expected by economists, but the shocker was a revision knocking first quarter growth down to 0.4 percent, from a previous 1.9 percent.

Economists have been expecting second half growth to accelerate to a level of about 3 percent.

"The (GDP) revisions were pretty massive. The risks have been to the downside for a few weeks," said J.P. Morgan economist Michael Feroli.

Feroli expects to see growth of about 2.5 percent in the current quarter but that is still a low level of activity.

"I don't think it's sufficient to get any meaningful job growth," he said.

Other companies laying off workers include Lockheed Martin , which is letting go 6,500. Credit Suisse is reported to be cutting 2,000, while UBS is reported to be trimming 5,000and Goldman Sachs , 1000. Cisco is laying off 6,500, and Canadian-based Research in Motion is cutting 2,000 jobs.

Evidence of July's hiring and firings will show up in the monthly employment report next Friday.

"I think it will be just a so-so number. I would say it is probably under 100,000," Feroli said. Job growth has been flat recently, with just 18,000 workers added in June and 25,000 in May. That compares to 217,000 in April.

Moody's economist Mark Zandi said the weak job environment has been the result of companies not hiring, as opposed to firing.

"So far, it's been a lack of hiring, but I thought it was more due to things like the Japanese quake effect on motor vehicles. But when you see these kind of growth rates, you're (companies) going to start refocusing on costs and that means layoffs. If we stay here much longer, there's going to be more cuts," said Zandi. U.S. auto manufacturing was impacted after the March earthquake because of the unavailability of parts from Japan.

Zandi said positive action by Congress on raising the debt ceilingand structuring a fiscal plan might also help the economy and the job situation, he said.

"Obviously, the economy is really struggling to grow..barely keeping its head above water in the first half. I think growth should accelerate in the second half of the year, if we get on the other side of the debt ceiling debate soon, and they extend the ceiling through to the other side of the election," he said.

Economists have said the drama around the debt ceiling extension and deficit reduction has sidelined business activity and consumers, but the amount of direct economic impact is hard to gauge. Congress has until Tuesday to extend the debt ceiling and is so far unable to find a deficit reduction plan it can agree on. (Follow the latest in the debt debate here)

"The economy is just sucking wind and will be suffocated if they don't nail this down," said Zandi.

"I think if they only extend it a few months that will be a prescription for going back into a recession as well," Zandi said.

Challenger releases its monthly layoff data next Wednesday. Challenger said the number of planned layoffs at U.S. firms increased in June for a second month. Employers in June announced 41,432 layoffs, up 11.6 percent from May and up 5.3 percent from the year earlier. Downsizing in the U.S was at its lowest pace in the first half since 2000.

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