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Could Mass Layoffs Return Next Year?

We have just come through a seemingly strong earnings season. I say strong, because 25 out of the 30 Dow stock components reported earnings that exceeded Wall Street’s consensus estimate. However, to be perfectly honest, Wall Street has set expectations incredibly low going into earnings season.

Looking deeper into these “strong” earnings performances, you will find that they were driven almost exclusively by cost cutting. The Wall Street Journal ran a story last Friday highlighting the fact that companies have been furiously cutting their Selling, General and Administrative (SG&A) expenses. The primary component of this expense line is people.

Since the beginning of 2008, nearly 6.7M people have lost their jobs due to the recession. Companies that faced declining sales moved to reduce their expense structure by announcing mass layoffs in hopes of preserving their bottom line earnings.

While many of these cuts were painful (especially for those workers who are now without at job), they did deliver cost savings. It was the cost savings from these layoffs that resulted in last quarters strong earnings performances.

However, the vast majority of companies still face declining sales numbers. Reports about “green shoots” in the economy is encouraging, but until the American consumer begins spending again it’s difficult to see many companies posting sales growth in the near term.

Fortunately over the next two quarters, public companies will have some relatively easy comps given the economic fallout that occurred in the last half of 2008. However, beginning in the first quarter of 2010 those comps will get more difficult. Companies will no longer be able rely on their headcount reductions of the last 12 months to deliver cost savings. So what then?

We can hope that the economy will be in full recovery mode by early 2010, but many economists believe that is unlikely. Without a recovery in consumer spending, revenues will continue to decline and companies will need to look at making more cost cutting initiatives. This could lead to potentially more layoffs in 2010 as companies try to deliver better than expected earnings performances by reducing their cost structure.

Unfortunately, this will only have the effect of driving the U.S. unemployment rate even higher. An unemployed consumer is unlikely to make many purchases which will only lead to further revenue declines for American companies.

Filed in: Careers, Economics

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