Companies Step Up Layoffs

Companies have stepped up layoffs to a level not seen in nearly a year, squeezing the job market and revealing fears about the pace of the economic recovery.

Cisco Systems Inc., Lockheed Martin Corp., and troubled bookstore chain Borders all recently announced hefty cuts, while recent government numbers underscore the shift in recent months toward cutting jobs.

Growth in layoffs─rather than a reluctance to add workers─is a key reason why the U.S. added an average of only 21,500 jobs over the past two months, far below the level needed to bring down unemployment, which now stands at 9.2%. The layoffs also reflect the shifting outlook of employers, many of whom had expected the economy to gain speed as the year progressed. Instead, growth has faltered. If the pace continues to disappoint, more companies will feel pressure to pull back.

‘Layoffs have played a big role (in weak job growth) over the last few months,’ says Mike Montgomery, an economist at IHS Global Insight. ‘The soft patch is more layoffs and nothing else to pick up the slack.’

Cracker Barrel Old Country Store, Inc. is among the companies that think consumers will remain under pressure for the rest of the year. The Lebanon, Tenn.-based restaurant chain said last week it let go of 60 workers, most at its headquarters. The move will save $10 million, Cracker Barrel said, citing higher commodity costs and the effect of a ‘challenging economy’ on consumer spending habits as reasons for the cuts.

In May, U.S. public and private employers shed 1.78 million workers, the highest level since August 2010. Among those layoffs, 1.66 million were from the private sector.

Other data indicate that employers are cutting more jobs. The government’s most recent comprehensive jobs report, released in early July, showed the number of people out of work for less than five weeks─a figure many economists use as a proxy for layoffs, since it tallies those recently let go─grew 15.5% from May to June to a total of 3.1 million. That’s the highest level for that gauge since October 2009. Meanwhile, the number of people applying for jobless benefits has been stuck at elevated levels above 400,000 a week since early April.

Some factors behind the increased layoffs are already dissipating, such as the effects of supply disruptions from the Japanese earthquake in March. But other problems have deeper roots, including the sluggish growth of consumer spending and the feeble housing market.

While businesses are starting to ratchet up layoffs, government has been trimming jobs for some time. The state and local government sector cut 142,000 jobs this year as states and smaller governments such as cities and school districts trimmed work forces to balance budgets.

Behind the cuts are jittery employers whose faith in the recovery─and, by extension, consumers’ willingness to spend─has been shaken. Companies are maintaining profit margins by cutting jobs and costs, and, for the moment at least, are investing in efficiency-enhancing equipment rather than new workers. Still, by turning to layoffs─which are costly in the short run as companies pay severance and restructure operations─businesses risk being caught flat-footed when the economy starts expanding at a faster clip.

‘That they’re looking to reduce staff means they don’t see a pickup in demand going forward,’ says Steven Ricchiuto, chief economist at Mizuho Securities.

Nationwide Insurance is among the many companies looking to pare costs. The Columbus, Ohio, property and casualty insurer this month cut 154 agents who sell auto and property insurance over the phone and online. Those positions, based in Portland, Ore., and Amarillo, Texas, are being consolidated in three other offices where wages and other costs are lower. The move also spares the company from making infrastructure upgrades that would be necessary to keep those employees working where they were, according to a spokeswoman.

The U.S. emerged from the grueling 2007-2009 recession just over two years ago. But after growing 2.9% through 2010, the economy has slipped into lower gear as consumers remain thrifty, the housing market stays weak and local governments trim spending and employment.

Gross domestic product, a broad tally of the goods and services produced in the U.S., grew 1.9% in the first three months of 2011, and economists surveyed by The Wall Street Journal project that pace will continue for the second quarter, which will be reported next Friday.

Many economists, including those at the Federal Reserve, have forecast growth accelerating to 3% or more in the second half, as Japan-related supply disruptions fade and energy prices recede from their summer highs. But in the past few months that view has come into question, as spending has slowed and surveys reflect mounting consumer pessimism. Economists, meanwhile, have started downgrading their estimates for second-half growth. The stepped-up pace of layoffs suggests companies are losing faith in the prospect of a second-half rebound.

Conor Dougherty
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