As Layoffs Continue, What's Really Going On With Jobs?

Entering February, a mixed picture on employment has developed that's making it difficult to determine whether employers are ready to begin hiring workers or are continuing to put the brakes on a recovery that has already begun.Job cuts in January reached 71,482 -- a 59% increase over December and the highest total since August, according to a report on employer layoffs released Wednesday by job placement firm Challenger, Gray & Christmas. While the break in the downward trend in layoffs is troubling, the January figure still represents a 70% reduction from the same time a year ago, when recession job losses peaked at 241,749.

"The increase in January is not necessarily a sign of a recession relapse," says John Challenger, chief executive officer of Challenger, Gray & Christmas. "It is not uncommon to see a surge in job-cut announcements to begin the year. Companies are making adjustments based on the previous year's results and the outlook for the year ahead."

Economists also point out that many of the layoffs announced this time of year are seasonal, as retailers and other business purge temporary and part-time workers hired from October through December. Retailers and telecommunications companies, which rely on these types of workers, were two industries announcing significant cuts.

'A Recovery ... That Just Hasn't Worked Its Way to the Job Market Yet'

Michael Montgomery, an economist with IHS Global Insight, says the high drop-off in layoffs from a year ago was the key number to focus on to determine if employment trends were headed in the right direction. He says the year-over-year decline in layoffs had been running about 70% each month and "if that narrows sharply to something like half of that, then that means there has been a real increase in layoffs and the recovery has got some problems."

Even though layoffs have taken an appropriate decline since last year, the potential for problems with the recovery is still very real unless announcements such as these end:

  • Verizon (VZ) said it will slash 13,000 jobs as it continues to take losses in its landline division.
  • Wal-Mart's (WMT) Sam's Clubs subsidiary will cut 10,000 mostly part-time workers and 1,200 membership recruiting jobs to stem losses at the struggling chain. Another 1,500 jobs will be eliminated when 10 underperforming Sam's Clubs stores are closed this year.
  • Pharmaceutical company AstraZeneca (AZN) announced that it will eliminate 8,000 jobs by 2014 in a cost-cutting move to counter anticipated future declines in revenue.
  • GlaxoSmithKline (GSK) is expected to announce between 3,000 and 4,000 job cuts as the company focuses on growth in emerging markets and diversifies away from its core pharmaceutical business into higher-growth areas, such as consumer health.
  • Electrical engineering firm Siemans (SI) is cutting 2,000 workers as it makes restructuring and capacity adjustments at its drive technologies and industry solutions units.
  • Shipping giant United Parcel Service (UPS) will eliminate 1,800 management and administrative jobs as it restructures the company to operate with better technology and fewer employees.
  • Telecommunications equipment maker Ericsson (ERIC) will cut 1,500 workers due to weakening demand for its products.
  • Defense contractor Lockheed Martin (LMT) will eliminate 1,200 jobs as a cost-cutting move as it combines its former Maritime Systems & Sensors business, based in Washington, and its Systems Integration unit in Owego, N.Y.
  • Home Depot (HD) will lay off 1,000 workers as it consolidates support functions in its human resources, finance and other divisions.
  • Oil giant Chevron (CVX) announced that it will layoff an unspecified number of workers from its worldwide refining, marketing and retail operations in March.
Montgomery says some layoffs are likely to continue because some companies are always "shrinking while the vast majority are expanding." Challenger expects layoffs through the first quarter of 2010. But with GDP growing at a pace of 5.7% in the fourth quarter of last year and the manufacturing industry showing signs of real strength in January, things appear to be progressing in the right way to produce job growth.

"Right now, it's a recovery in the economy that just hasn't worked its way to the job market yet," he says.

The Challenger report said just over 31,381 workers were hired in January, so the point where employers are ready to hire may be closer than people think. Still, with such rosy GDP numbers, the lack of job growth is perplexing.

Rising Productivity Is Limiting New Hires

"The most straightforward answer to why employment is declining despite rising GDP is that productivity has increased," says Moody's Chief Economist Mark Zandi. "During the past two quarters, productivity expanded at an as­tounding pace of close to 8% annualized. This is the strongest two-quarter gain on record outside of a period in the early 1960s, when productivity bounced back after a protracted decline. Productivity weakened during the Great Recession, but it never fell."

In a recent report on the job market, Zandi pointed out that new technology has improved productivity so much that the U.S. can now produce high levels of GDP growth with fewer workers than in the past. He believes that the difficult economic environment has invited employers to test the limits of productivity with fewer employees, and they don't want to give up those gains until they are confident the economy won't contract again.

"Judging by the job creation rate, businesses are much less willing to hire than at any time since the Bureau of Labor Statistics began calculating these numbers in the early 1990s," he says.

Zandi adds that ultimately businesses will get around to using the profits generated by productivity gains to expand their businesses and hire more workers. That's not likely to happen in large numbers until current workers can't work any more hours than they already are. And that could take some time.
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