Credit Crisis In Hand, Economy Faces Rolling Lay-Offs Which Could Hit Millions

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UnemplyNow that the government has done its best to address the credit and banking crisis by putting $700 billion into the American financial system, the economy faces what is likely to be a very long recession. It will almost certainly be deepened by falling home prices which have not found bottom. The loss of equity in housing, tight credit, and dropping corporate earnings virtually always lead to substantial layoffs across a number of industries. A recent survey by Workplace Options said that nearly 50% of US workers fear for their jobs

The early victims of a slowdown, especially when there has been inflation in fuel and other energy costs are almost always the auto and airline industries. Virtually every carrier has already cut its flights by 10% or more and laid-off thousands of people. Detroit has been going through a systematic downsizing for more than two years, cutting tens of thousands of positions. Daimler laid off more people this week and a GM (GM) merger with Chrysler could cost more jobs.

The unemployment rate was 6.1% in September. In the deep recession of 1973/1974, the  unemployment rate reached almost 9%. There are currently about 148 million people in the US civilian workforce. If unemployment rises to nearly 10%, another six million or more people would be out of work.

There are already signs that industries well beyond autos and airlines have begun to take out jobs. Pepsi (PEP), which is supposed to be in the "recession proof" consumer goods sector, reported weak earnings and said it would cut 3,300. SAP (SAP), the No. 2 enterprise software company in the world, said it would miss numbers and cut staff. Global conglomerate Philips is lowering  its headcount after its medical systems business hit a bad patch. Supermarket chain Supervalu (SVU) cuts its estimates again. It did not mention pushing out employees, but as a $40 billion business, it will not be able to keep all of its people as earnings fall. Even white shoe law firms are letting people go.  Clifford Chance just fired a number of lawyers in its M&A operations.

Financial

The first and most obvious area which will be hit very hard is the financial industry. That is true for two reasons. The first is that a number of very large companies have already merged or gone out of business. The layoffs are still coming at parts of Lehman, Washington Mutual, Wachovia (WM), and Merrill Lynch (MER). The head of Citigroup has pledged to cut operating costs. Citi could easily cut another 20,000 jobs. The Wachovia and Merrill deals merging them into larger partners could cause closer to 30,000 lay-offs

As housing prices continue to fall, it is almost certain that banks will be required to take more losses and find additional ways to cut expenses. It is not hard to imagine that between this past June and the same time next year that the industry could lose several hundred thousand jobs. The job losses could go higher if medium and small banks are taken over by the FDIC in increasing numbers. Banking analysts think that several hundred banks could close if the downturn lasts four or five quarters.

Supermarkets and Fast Food

Food retail, both at the supermarket and restaurant level, is extremely vulnerable to cuts. Food prices are up. Add that to tight credit and concerns about employment and people will cut back on eating out and buying anything more than the essentials for eating at home. Aside from Supervalu, which has already said it is struggling, Kroger (KR) and Safeway (SWY) could be affected as well. These three largest chains have more than 750,000 workers. If same store sales drop sharply and a large number of outlets are closed watch for as many as 50,000 people being out of work.This does not take into account the scores of smaller chains and tens of thousands of individual food retailers around the country.

Serious unemployment always affects the ability of people to spend money on eating out. Starbucks (SBUX) has already let more than 10,000 people go. Because it is the largest fast food chain with the best balance sheet and the ability to get good prices from suppliers, McDonald’s (MCD) may use a recession as a way to pick up market share, even if it does hurt earnings. That leaves the next tier of inexpensive restaurants. Domino’s (DPZ) has just announced that its revenue would be worse than forecast. According to the company "Our operators face the powerful forces of high commodity prices, consumers who are reluctant to spend, and a credit crunch that has slowed domestic new store growth, reinvestment in stores and our ability to expedite the turnover of poor-performing franchisees," CEO David Brandon said in a statement. The news dropped the firm’s shares by 25% in one day. Papa John’s (PZZA) and Yum Brands (YUM) serve the same market. They are likely to be facing the same challenges. The three companies have over 75,000 workers. It would not be surprising if 10% of those people lost jobs. Add to that all of the local competitors and the employee pool in the cheap fast food business must be in the hundreds of thousands. It is a sector which works on small margins. People in it will be losing work

Internet and E-commerce.

Many Wall St. analysts thought that tech would be the last industry to be hit by a poor economy. Internet e-commerce and content businesses and software are essential to consumers and businesses in almost every sector. If every sector is hurt financially however, e-commerce loses its advantages over physical shopping. When people are not buying at all, it does not matter that they prefer to buy things online. The other large portion of internet revenue comes from advertising. The recession is already hurting display ad sales and that has pushed shares of Yahoo! (YHOO) to nearly  52-week lows. Even Google, the most powerful company in the sector has lost about half of its market value in a year. Google, Yahoo!, Ebay (EBAY), and Amazon (AMZN) employ 75,000 people among them. Rumors are that Yahoo! could take out 20% of its people, about 3,000 jobs. Ebay just let go 1,000 workers, 10% of its staff. Add to that the dozens of smaller public internet companies and the pool of people is in the hundreds of thousands. If that happens, it is a sign that the industry is well into a major downsizing.

Software

The other part of the tech business which has had very few job cuts over the last half decade is software. Microsoft (MSFT), Oracle (ORCL), SAP, and IBM (IBM) have done consistently well. Among them, these companies employ over 600,000 people. They are at the top of the food chain with dozens of less well-financed firms like Redhat (RHT) and Salesforce (CRM). Many of the firms at this level employ 2,000 or 3,000 people. If the SAP earnings warning is an early signal, the software side of tech could put a hundred people out of work.  In the closely related hardware business, HP (HPQ) just fired almost 25,000 workers. This is a disease which will spread.

Oil

The oil sector is another part of the economy which has done remarkably well because of the rising price of crude. Now that prices are dropping but exploration and refining costs are moving up, the good days at Big Oil are over for the time being. Exxon (XOM) set the single-quarter earnings record for any US public company in the second quarter of the year with net income of almost $12 billion. Those profits are going to take a mighty squeeze with oil down from $147 to under $90. Exxon has 110,000 workers. Chevron (CVX) has 65,000. Conoco (COP), Halliburton (HAL), and Schlumberger (SLB) employ tens of thousands more. The number of energy workers could contract just as fast as it expanded. In an industry with several million workers even a 5% cut across the sector would be especially painful. Among them, the ten largest oil and oil-related companies could let 100,000 people go.

Media

Another stable industry over the last several years has been big media companies. Advertising revenue has been good. Now, it is not just bad, it is getting very bad, very fast. Both CBS (CBS) and Viacom (VIA) warned about earnings last week. These stocks and peers like Disney (DIS) and News Corp (NWS) are off to multi-year lows. The six large media companies which also include Time Warner (TWX), Disney, and the NBCU division of GE (GE) employ close to 400,000 people. Add together the weakening newspaper business and the number of people who are employed at large media operations and the figure is close to two million. That does not include all of the local radio, TV, and small newspaper operations. Papers are already chopping staff levels by 15% to 20%. If the recession spreads broadly across the sector it is not hard to image 100,000 or 200,000 people being out of work by the end of 2009.

Most of the industries mentioned here have had stable or growing employment since the last big market downturn in 2001. Already damaged sectors like autos are likely to shed even more people. The worst segments of the economy may still suffer the most, even with all of the costs they have already chopped.

But, the recession is spreading to the great job- creating industries of the last two decades whether that is software, hospitality, or energy. The wave is about to capsize them as well.

Douglas A. McIntyre

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