Many of the layoff announcements which came over the last several days were as unexpected as they were large. If a recession is measured by the rapidity and breadth of job losses across huge parts of the economy, the current downturn will be unusually vicious. Even highly profitable firms are resorting to firings relatively early in what is almost certain to be an extremely difficult cycle which could last for several quarters.
The cuts at Motorola (MOT) were expected. The handset division which the company planned to sell-off is so badly damaged that the firm cannot part with it. Revenue at the cell phone unit fell by 31% and only 25 million handsets were shipped, less than half of what was going out the door two years ago. Motorola has already been though two series of “downsizing”, and another 3,000 people were sent out the doors today.
Media companies are also expected to suffer more than the economy as a whole. Time Warner (TWX), Gannett (GCI), Yahoo! (YHOO) and Conde Nast all said they would make large cuts as their advertisers’ budgets are taken to bottoms not seen in decades in the auto, real estate, and employment sectors.
There was also very little surprise when analysts in the auto industry said that a GM (GM) merger with Chrysler would cost 35,000 jobs or more. It appears that the Federal Reserve or Treasury may put up as much as $10 billion to support a marriage which will do a great deal to undermine the employment bases and economies of Michigan and several other states with large numbers of auto workers. The situation is so severe that the industry must lose a leg to save the rest of the body.
The breathtaking parts of the list of companies cutting people are the plans at American Express (AXP), Electronic Arts (ERTS) and Whirlpool (WHR). At Amex, 7,000 poor souls are gone. The credit card company made $815 million in the last quarter. Whirlpool had a modest drop in earnings to $163 million in the last quarter from $175 million a year earlier. At EA, 6% of the workforce will go. EA still expects to make EPS of as much as $1.40 this year on revenue of almost $5 billion. Each firm is facing a slowing of its business but not a catastrophe.
In a modest recession there is always an expectation that the companies in industries which are crushed by the cycle, which are usually financial, automotive, and airlines, will resort to cutting as many employees as they can and still operate at a lower capacity. Most other industries keep employment at reasonable levels in the expectation that extremely large expense cuts will undermine their capacities to take advantage of an economic recovery.
What the layoff news is showing now, in what is probably the second quarter of a recession which could last for six or seven, is that large corporations believe that their revenues will get much worse and that the chance for improvement is further into the future than most companies believe that they can reasonably gaze.
With each job that is lost at a company that is doing relatively well, the probable depth of the downturn gets worse. Many of the cuts being announced now are based more on confusion and fear than on reason.
Douglas A. McIntyre