The Return Of Layoffs

Economists cheered the ADP data that showed the private sector added 187,000 jobs in January. It did not help the stock market much but was probably offset by bad news from Egypt. The ADP figures may signal the numbers from the Labor Department on national unemployment will be good. Most estimates are the jobless rate cannot fall unless 250,000 people gain employment each month.

However, there remains sporadic but more frequent announcements of layoffs. Many of these are in the public sector. Governors and mayors have already said that head count reductions will be critical to closing budget gaps. New York State, for example, could fire more than 10,000 people. Other states like California elected governors who ran on austerity platforms. It is now time for them to deliver on their promises.

The layoffs which should cause more concern are those made by large businesses. Many have announced weak fourth quarter earnings and forecast a difficult 2011. One way to keep investors from selling their positions is to promise headcount reductions to improve margins. Pfizer (NYSE: PFE) will cut 5% of its 110,00o workers. Big pharma still cannot recover from loss of patents on blockbuster drugs.

There is a pick-up in M&A activity, driven in large part by access to inexpensive capital and what is believed to be a better economy. The Massey deal with Alpha will probably cause job losses. The two companies are in very similar businesses. Duke Energy is buying Progressive Energy. The two firms have nearly identical operations. The $13.7 billion price tag Duke has paid will have to be justified quickly. The New York Times Dealbook section which tracks M&A transactions, among other things, seems to report on one or more buyouts or mergers a day.

The necessities of reactions to weak earnings and the need for merged companies to show quick cost reductions, combined with public sector layoffs, are likely to mean the unemployment picture will not get much better.

Douglas A. McIntyre