77-Layoffs, Expectations and the Economy

We are flirting with the highest levels of unemployment in a generation. Things feel bad and are bad. They could get a lot worse.

Consider some of the recent lay-offs. Macy’s laid off 4% of its workforce. U.S. Steel laid off 16%. Sun Microsystems announced plans to lay-off 15 to 18% of its workforce, Texas Instruments 12%, Sprint 14%. In most of these cases, the lay-offs seemed large, and they are.

But they are not as large as they may seem. In fact, an unscientific analysis suggests there may be a pattern here that contains a warning for the future. Most of the companies reporting in the last few weeks are laying off between 10 and 20% of their workforce. However, behind those lay-offs are reductions in current quarterly revenues of 20 to 30%. These companies are laying off at a slower rate than their revenues are falling. (See the Perspective, “Costs: The Last Consideration” on StrategyStreet.com.)

So, what does this tell us? Two things. First, the companies believe there will be a turn-around within a year or so. They are willing to see margins fall in order to hold experienced employees in anticipation of a rebound in demand. Second, the economy could be much worse than it is. If the average employer has laid off about 75% of the workers it would need to lay off to match the workforce with the current revenues, unemployment would be even higher than it already is. If the anticipated turn-around does not appear as expected, there would be a catch-up period as companies “right size” their organizations for the new, lower, revenue base.

Now there’s a scary thought for the politicians.

Posted 2/5/09

Update:

The layoffs in the early Covid economy were more extensive but somewhat less painful. The economy fell roughly 10% in a little over a month. During that period, roughly 15% of the workforce went on either temporary or permanent unemployment, exceeding the falloff in the economy. Small business revenue fell by 20%. The number of labor force participants not at work quadrupled from January to April 2020. As bad as these numbers were, federal and state assistance initiatives helped reduce the degree of pain suffered by the newly unemployed.

A cost reduction program must ensure that the company maintains its lead over competition, especially in market share, which is the ultimate source of low-cost. For more explanation of this idea see this perspective from the body of the blog above and also further thoughts HERE.

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