Layoffs could signal a double-dip, or a fundamental shift

Recently we have seen multiple companies in multiple industries laying-off workers at an alarming pace, including HSBC, a major global banking firm, that just announced this week that they were dumping 30,000 workers.  On Friday Merck announced that they were kicking 13,000 to the curb, while Borders, which is bankrupt, is sending 10,700 to the unemployment lines.

We saw GDP come in last week at an anemic 1.3%, far, far below what most economists and analysts had previously expected, including the mighty Goldman Sachs, which recently cried uncle and dropped their 2011 GDP estimate from 3% to 2% (they are still too high).  Goldman still maintains a 1,405 target for the S&P 500 by the end of 2011, which wasn’t looking so unachievable a few weeks back when the S&P 500 was above 1,350, but at 1,250 looks like wishful thinking.  That target would represent a 16% advance from where we are today, and we are not at the bottom, unfortunately for them.

The layoffs could signal a growing risk of a double-dip recession, which I have written about extensively.  While I still think a double-dip is entirely possible, I am not convinced that these layoffs should be interpreted to mean that companies, even the ones doing the layoffs, are performing poorly.  On the contrary, all evidence points to companies doing better, not worse.  We have seen strong earnings reports for several quarters, going all the way back to the third Q last year.  More impressive is the fact that in the most recent quarter, we have seen the majority of companies reporting top-line revenue gains that strongly indicate that people are spending money in the economy.

This leads me to the conclusion that companies are not laying people off because they think the economy is bad today, or more importantly because they think the economy will be bad in the future.  These layoffs tell me that companies are facing increasing competition, made even worse by the weak dollar, which is drawing more and more companies from outside the U.S. into our markets, and this increasing competition is forcing companies to cut costs anywhere they can.  Add to that advancing technology which allows companies to do what they do with fewer humans, and you have a recipe for higher unemployment.

This trend, unfortunately for those looking for work, is not going to necessarily improve with our GDP growth rate.  Unemployment will only improve if and when new companies are being formed at a brisk pace, driving demand for workers.  New companies will not be able to get off the ground though, unless the tax code and healthcare costs are reined-in to incentivise people to take risks with their capital, time, and efforts.  The current climate, economic, financial and political, is not conducive to entrepreneurship.  Without new businesses, I do not believe we will see unemployment coming down; at least not until or unless GDP growth rises well above 3%, which I do not expect to see before 2013 at the earliest.

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