Earn What You Spend

To get an understanding of the current situation in layoffs and unemployment claims, take a look at this graph from this morning’s Wall Street Journal: 

Source: WSJ

We’re seeing quite a number of layoffs from major corporations:  AT&T, Dupont, Credit Suisse, Viacom, Avis and more.  With the exception of Credit Suisse, these companies have not been on the front lines of the credit crisis, a clear indication that the slowdown has spread throughout the economy. Even if these companies are not currently facing massive losses, these layoffs are often anticipatory.  Viacom and other media properties are just seeing the beginning of the pullback in advertising spending, and virtually every indication is that this pullback will increase drastically. 

So far this year, the American economy has lost 1.2 million jobs - not an insignificant number.  It’s an economy-wide retrenchment  - and it is helpful to think of the earn / spend equation for a corporation.  These companies feel confident they won’t be earning more in the next 6 - 12 months - their revenues are certain to be flat, or, more likely, falling.  So they are forced to cut the spending side, and employment is a significant percentage of a companies expenses.

Now at a certain point, any company that hopes to grow - and growth is the lifeblood of a business - must stop this retrenchment, begin to take risks again, and move into new markets.  That simply can’t be done without a strong workforce.  So layoffs are certainly risky in and of themselves - though “trimming the fat” is usually necessary since the inefficiencies in any corporate workforce are significant, the human capital at any company is one of its most valuable assets.  A short-sided correction now can lead to a significant dampening of future growth.

I’m of the opinion that most companies overshoot in either direction - when the economy is strong, they expand beyond what is necessary on anticipated future earnings, and when the market turns, they frequently cut costs in unnecessary or inefficient ways.  It is important to remember that these are people’s livelihoods that are at stake, so let’s hope these companies don’t overcorrect in any trimming of their workforce.