Economists say steep job cuts at Caterpillar, Sprint, and Pfizer may only signal the halfway point
In a single day, on Jan. 26, at least 50,000 new layoffs were announced at companies as varied as telecom giant Sprint Nextel (S), construction equipment maker Caterpillar (CAT), semiconductor manufacturer Texas Instruments (TXN), and pharmaceutical house Pfizer (PFE).
It was a stark reminder of how rapidly the recession is claiming jobs. Already 170,000 jobs have been lost in January. The U.S. economy lost 2.6 million jobs in 2008.
The worst news, though, may be that some economists say in their most optimistic view the U.S. has only reached the halfway mark in terms of the layoffs expected for this recession. A growing number of economists also say that the U.S. economy is not just shedding jobs temporarily, but may be undergoing a painful restructuring process that will eliminate some types of jobs for good. "We are seeing very large layoffs—the kind you get when companies don't expect to be re-employing any time soon," says Peter Morici, a professor at the Robert H. Smith School of Business at the University of Maryland. "They [represent] structural, not cyclical, changes to the economy. We're looking at a permanently smaller economy with prolonged unemployment at an unacceptable level."
Jobs Gone for Good
Morici says that housing, real estate, automobiles, finance, and retail sectors are resetting to "permanent lower levels" of employment. Mike Montgomery, an economist with IHS Global Insight, asserts that many jobs in autos, manufacturing, apparel, and textiles aren't coming back. Those industries "have been in a long-term decline, and the recession is knocking them out."
"We are very early in the cycle," says Morici. "We are going to see the fury of the Old Testament for what we have done to the economy."
Many economists see nationwide unemployment rising to at least 9% this year, possibly reaching double digits in 2010. All 50 states and the District of Columbia recorded both over-the-month and over-the-year unemployment rate increases, the Bureau of Labor Statistics of the U.S. Department of Labor reported on Jan. 27. Nineteen states are already above the national average of 7.2%, with Michigan (10.6%), Rhode Island (10.0%) now into the double digits. South Carolina (9.5%), California (9.3%) and Nevada (9.1%) follow closely behind.
Worst Since 1982
On Jan. 26, a National Association for Business Economics (NABE) survey depicted the worst business conditions in the U.S. since the report's inception in 1982.
Among the cuts announced on Jan. 26:
Caterpillar, the world's largest maker of mining and construction equipment, announced 5,000 new layoffs on top of several earlier actions. The latest cuts of support and management employees will be made globally by the end of March. The company says it is in the process of shedding about 20,000 jobs. The company employs 112,000 worldwide.
Wireless phone carrier Sprint said it is eliminating about 8,000 positions in the first quarter as it seeks to cut annual costs by $1.2 billion. The layoffs will trim about 14% of Sprint Nextel's 56,000 employees. The company said it is also suspending its 401(k) match for the year, extending a freeze on salary increases, and suspending a tuition reimbursement program.
Pharmaceutical company Pfizer, which announced a deal to buy rival drugmaker Wyeth (WYE) for $68 billion, said it would cut 8,000 jobs. The cuts will begin in the first quarter and are to be complete by 2011, according to company spokesman Ray Kerins. Cuts will include most departments, from administration and sales to manufacturing and research.
Home-improvement retailer Home Depot (HD) said it was closing four small units—Expo Design Centers, YardBIRDS, Design Centers, and HD Bath, a bath remodeling business—trimming about 7,000 jobs in the process. The cuts represent about 2% of Home Depot's total workforce.
General Motors (GM) said it will cut 2,000 jobs at plants in Michigan and Ohio and will halt production for several weeks at nine plants over the next six months because of slow sales. The company said the layoffs are part of its efforts to "align production with market demand."
Texas Instruments, which makes chips for cell phones and other gadgets, said it will cut 3,400 jobs because demand has slackened amid a slowing economy. It will cut 12% of its workforce—1,800 jobs through layoffs and another 1,600 through voluntary retirements and departures.
Looking for a Jump-Start
To try to stem the layoffs and reclaim some of those lost jobs, President Barack Obama has proposed an $825 billion economic stimulus package that is making its way through Congress. The plan would pump money into the economy
—by way of spending on roads, mass transit, technology, and energy projects, and through tax cuts—in the hope of jump-starting job growth. The goal is to create 3 million to 4 million jobs. Economists who favor such heavy government spending say the package would prevent a 0.75% to 1.5% rise in the unemployment rate by the start of 2010. "The [stimulus] plan will make a measurable difference in the job market," says Mark Zandi, chief economist at Moodys.com (MCO). "The downside risk comes if it doesn't pass."
In the NABE survey, 52% of economic forecasters said they expected gross domestic product to fall by more than 1% this year. Many analysts predict the economy will have contracted at an annual pace of 5.4% in the fourth quarter of 2008 when the government releases that report on Friday. If they are correct, that would mark the worst performance since a 6.4% drop in the first quarter of 1982.
One reason for the shrinkage is that the era of debt-based consumption is giving way to one in which consumer spending slows as incomes fall. "The U.S. consumer is going from powering the global economy to following along [global economic trends]," says Zandi. "Spending at best will match their incomes and will likely fall short of it."
"Once in a Lifetime"
As layoff announcements mount, more CEOs suggest their companies are undergoing fundamental changes. "We're certainly in the midst of a once-in-a-lifetime set of economic conditions," said Microsoft (MSFT) Chief Executive Steve Ballmer during a conference call on Jan. 22, after the company announced weaker-than-expected quarterly earnings. "The economy is resetting to a lower level of business and consumer spending." That day, Microsoft announced 5,000 layoffs, or 5.5% of its workforce, as well as reductions in thousands of contract jobs.
But because many businesses were already operating with a lean workforce when the recession began, there is some hope they will fill vacated positions when the economy improves. "The vast majority of the job loss is strictly short-term," says Montgomery at IHS Global Insight. "When consumer demand and sales come back, the jobs will come back."