Why Big Companies Are Axing Jobs

Bad business decisions—not a new recession—are behind the scary news about some big layoffs.

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Is Bank of America a White House prop?

As if on cue, the struggling financial giant announced it would lay off 30,000 workers just as President Obama began a barnstorming tour to lobby for his $477 billion jobs plan. Obama wants Washington to help keep teachers, cops and construction workers on the job, and hasn't said much about helping laid-off bankers. Yet the B of A cuts seem to underscore the whole economic problem Obama is battling, especially since the bank's woes stem from mortgage defaults and other Main Street borrowers who can't repay their loans.

[See how to escape the middle-class squeeze.]

Five-digit layoff announcements were a regular feature of the Great Recession, especially in 2009, when it seemed like every big employer in America was scouring its payroll for scalps. Now, there are worrisome signs of a second wave of corporate bloodletting. The U.S. Postal Service just announced plans to slash its workforce by 35,000. British bank HSBC, which has a strong U.S. presence, is axing 30,000 workers. About 11,000 people are losing their jobs as the Borders bookstore chain liquidates. Even Goldman Sachs is trimming its gilded workforce by 1,000 or so.

A return of large-scale layoffs would certainly suggest that a double-dip recession is imminent. The economy is barely growing right now, with unemployment stuck at 9.1 percent. The debt problems in Europe seems to be getting worse, not better, with investors girding for a Greek default that might trigger a financial crisis. Here in the United States, Congress wrecked confidence over the summer with threats of a U.S. default, then produced an underwhelming debt-reduction plan that led to America's first-ever credit-rating downgrade. Economists repeatedly warn that such a fragile economy is highly susceptible to shocks—like a few big job-cut announcements.

If there's any good news about those headline layoff announcements, however, it's that they don't reflect new problems in the economy. Instead, they're the result of longstanding struggles, bad business decisions and the basic fact that some companies are always falling behind the competition. Bank of America has become the nation's Big Money poster-child for one main reason: The disastrous acquisition of Countrywide Financial in 2008, which may have been the worst business deal of all time. In addition to billions in losses on bad mortgages that Countrywide wrote, B of A also faces a mountain of litigation over suspect underwriting and fishy foreclosures. It may face additional losses if the European debt crisis causes a cascade of bank writedowns. Many analysts believe B of A has not fully accounted for all the losses it faces, which has led to a plunging stock price and urgent cost-cutting.

[See how the debt fiasco damaged the economy.]

The European debt bomb, and all the possible ramifications, are a relatively new risk to the U.S. and global economy, but most of Bank of America's problems date to the subprime crisis of several years ago. It's no surprise that it's taking this long to work off the hangover. The bank bailouts of 2008 and the Federal Reserve "stress tests" of 2009 were intended to stabilize a banking sector on the verge of implosion, but nobody thought they would vaporize a vast amount of losses overnight. Recovering from a financial crisis takes years, and B of A's current woes are part of a long deleveraging process. The same goes for HSBC, Goldman and many other financial firms that are downsizing. They may not have liabilities as severe as Countrywide, but they are still struggling with constrained profits, new regulations and a tough environment for making money. It would be nice if a booming recovery flooded their coffers with cash and washed away all the sins of the last decade, but reality is less magical. Still, these job losses are really due to the last recession, not to a new one that's brewing.

The postal service has been reeling for years, and job losses there are also due to longstanding factors that have little to do with today's economy. Over the years, Congress has given the USPS more independence than a typical government agency—but not nearly enough to function the way a true corporation would. So while it's supposed to be self-funding, financing its operations through its own revenue, the postal service remains thoroughly shackled when it comes to innovating, closing underperforming branches and reforming its pension and healthcare plans to make them more affordable. And of course it's rapidly losing business as consumers shift from physical to digital communication. Over the last five years, the USPS has lost about $20 billion and cut its workforce by nearly 150,000. But it continues to bleed money, so the jobs cuts continue.

[See how Congress has impoverished the postal service.]

Borders, which declared bankruptcy earlier this year, is a casualty of rapid technological change and its own strategic missteps. Earlier in the decade, the bookstore chain took on a lot of debt to finance retail expansion, when it should have been focusing on the digital marketplace and the threat posed by online giants such as Amazon. The recession amplified Borders' debt problems, but by then the company had already made the wrong bet at a crucial juncture. It was the same story with video-rental chain Blockbuster, which declared bankruptcy in 2010 and spent 2011 closing hundreds of stores. Other big firms that have announced major layoffs this year, such as Merck, Pfizer and Cisco, are retrenching due to mergers, strategic misalignment or competitive pressure. The weak economy hasn't helped, but those companies would probably be forced to slash costs and payrolls even in a vibrant recovery.

[See 4 lessons from the demise of Borders.]

The pace of layoffs, in fact, has been one of the few bright spots in 2011. Placement firm Challenger, Gray & Christmas, which tracks layoffs, says firings so far this year have been at the lowest level since 2000, which was the last truly strong year for the U.S. economy. Part of the reason layoffs have tapered off is that companies fired so many people in 2008 and 2009, with many companies now pushing their remaining workers to the limits of their productivity. The real problem isn't layoffs, it's lack of hiring and a paltry pace of new-business creation. That does reflect concerns about the weak economy and the possibility of another recession, since companies don't want to take workers on if they might have to let them go in a few months. But for now, most companies are holding on to the workers they've got. Now, if they'd only embrace a few new ones.

Twitter: @rickjnewman

  • Read about what will happen if Greece defaults.
  • Read about 11 countries that make America look good.
  • Read about the broke postal service.