Layoffs, Expectations and the Economy

We are flirting with the highest levels of unemployment in a generation. Things feel bad and are bad. They could get a lot worse.

Consider some of the recent lay-offs. Macy’s laid off 4% of its workforce. U.S. Steel laid off 16%. Sun Microsystems announced plans to lay-off 15 to 18% of its workforce, Texas Instruments 12%, Sprint 14%. In most of these cases, the lay-offs seemed large, and they are.

But they are not as large as they may seem. In fact, an unscientific analysis suggests there may be a pattern here that contains a warning for the future. Most of the companies reporting in the last few weeks are laying off between 10 and 20% of their workforce. However, behind those lay-offs are reductions in current quarterly revenues of 20 to 30%. These companies are laying off at a slower rate than their revenues are falling. (See the Perspective, “Costs: The Last Consideration” on StrategyStreet.com.)

So, what does this tell us? Two things. First, the companies believe there will be a turn-around within a year or so. They are willing to see margins fall in order to hold experienced employees in anticipation of a rebound in demand. Second, the economy could be much worse than it is. If the average employer has laid off about 75% of the workers it would need to lay off to match the workforce with the current revenues, unemployment would be even higher than it already is. If the anticipated turn-around does not appear as expected, there would be a catch-up period as companies “right size” their organizations for the new, lower, revenue base.

Now there’s a scary thought for the politicians.