With concerns that consumer spending will wilt as the nation edges toward a recession, some observers say a wave of corporate layoffs is coming in the not too distant future.
“It’s unavoidable,” said Peter Schiff, president of money manager Euro-Pacific Capital. “Corporations are going to have to get leaner, and there are going to be a number of layoffs throughout the year.”
While a number of banks, led by Citigroup and Bank of America, have already revealed plans to lay off thousands of employees, companies such as Yahoo, Lockheed Martin and Home Depot announced last week they would be reducing their headcounts by 1,000, 850 and 500 employees, respectively. At the same time, layoffs also started to creep into the picture at retailers such as J.C. Penney and Eddie Bauer, where officials said last week that they would be cutting several hundred jobs combined.
“The biggest risk for corporations in 2008 is that consumers stop spending, either because they cannot [spend] or because they are afraid to spend,” said John Challenger, CEO of outplacement consulting firm Challenger Gray & Christmas. “The layoff picture didn’t worsen much last year, but if people stop spending, corporations will be forced to be more cautious.”
Part of the reason that layoff numbers were relatively reasonable last year—for all of 2007, there were 15,493 announcements of mass layoffs, according to the Bureau of Labor Statistics, a 10 percent jump from 2006 levels—was that many corporations haven’t been hiring at the same aggressive rates in recent years as they were before the dot-com bubble burst in 2000, Challenger added.
Moving forward, this could pose a unique management challenge: Because of the more sober hiring rate in recent years, there is less “fat” to cut if a company is considering making layoffs, said Lorraine Hack, a partner in the financial officers group at executive search firm Heidrick & Struggles.
“Basically,” said Hack, also a former CFO, “it becomes a question of what limb you can live without most.”
This could mean that some companies look at functions such as marketing or advertising if there is an immediate need to reduce costs. Or, if a company isn’t inclined to pursue acquisitions in the near future, it may choose to make job cuts in its M&A or corporate strategy groups.
“At the same time, if you have one of your senior employees leave voluntarily, maybe you just choose not to replace them right now,” she said. “You don’t want to cut your muscle too much, however, in case things turn around faster than expected.”
So far, the types of job cuts have varied greatly. Some have made reductions at just the corporate level, such as Home Depot, which announced January 31 that it would cut 500 workers at its Atlanta-based headquarters, or 10 percent of the workforce there. The layoffs, which are a response to a “tough environment” for consumer spending, said company spokesman Ron DeFeo, will take place across “every function” of Home Depot’s corporate operations but will not involve employees at any of Home Depot’s 2,200 stores. This is because Home Depot will continue to invest in stores throughout 2008. “That’s where the customer interaction takes place,” DeFeo added.
Eddie Bauer also said that most of its layoffs would take place at its headquarters, and not at its 432 retail stores. And Wal-Mart, according to a report last week in the New York Times, will shut down two clothing divisions at its main offices in Arkansas, the first time in years the company has made significant job cuts at its headquarters.
While details of Yahoo’s plans to trim its workforce by roughly 7 percent will not be made available until later this month, Jim Friedland, an analyst at Cowen & Co., said the cuts will most likely be concentrated in the lowest-performing units, not in the executive ranks.
“It appears to be part of a strategic transformation plan for the company to focus more on its core businesses, which haven’t really seen any signs of economic weakness,” Friedland said. Overall, however, Yahoo’s profit dropped by 23 percent in the fourth quarter, the company announced January 29.
While it may be uncertain exactly where, or how, the bulk of potential layoffs may take place this year, it is clearly weighing on the minds of corporate executives right now. Last month, in a survey of more than 1,300 senior-level executives conducted by employment consulting and legal firm Career Protection, roughly half of the executives polled said that they are planning layoffs and reductions this year. That’s up from only 13 percent of executives who were considering layoffs last January.
“It’s by far the worst forecast that we have had in the last five years, and I was shocked by the breadth of industries predicting layoffs,” said Kirk Nemer, president and CEO of Career Protection.
Specifically, he said that his company has been “inundated with calls” this month from employees at Bear Stearns, Citigroup, Ford, General Motors, Sprint Nextel and Indy Mac, each of which has recently announced workforce reductions.
Nemer added that most executives cited a recession and the slowdown in revenue during the fourth quarter as their main reasons for considering layoffs.
Already, 2008 has seen a notable spike in unemployment levels. The Labor Department reported for the week of January 21 that claims for unemployment rose by 22 percent to 375,000—the largest one-week uptick since September 2005, shortly after Hurricane Katrina.
To put that in perspective, there were almost 1.6 million jobless claims filed in all of 2007, or an average of 130,000 claims a month. Some think those numbers will easily be exceeded this year. David Rosenberg, an economist at Merrill Lynch, said in a recent research note that he expects to see a total of 2.5 million job losses this year, and forecasts that the unemployment rate will rise to 5.75 percent from 5 percent by the end of the year.
Filed by Mark Bruno of Financial Week, a sister publication of Workforce Management. To comment, e-mail firstname.lastname@example.org.