Large-scale layoffs could damage economy

Large-scale layoffs in the wake of last week’s terrorist attack could damage an already fragile economy, putting another dent in consumer confidence and curtailing retail spending, experts say.

Just this week, Boeing Co. said it will lay off up to 30,000 workers in its commercial jet unit by the end of 2002. American Airlines has slashed 20,000 full-time positions, and United Airlines said it will do the same. Continental Airlines cut 12,000 employees on Saturday, while U.S. Airways furloughed 11,000 on Monday.

So far, airline-related layoffs are approaching 130,000, a number that could be just the tip of the iceberg if Americans continue to shelve their travel plans, canceling hotel reservations and cruises. One travel industry spokesman has warned the trickle-down effect of layoffs could run as high as 650,000.

“The contraction of the airline industry is a major blow to consumer spending,” said Kurt Barnard, president of Barnard’s Retail Trend Report, an industry newsletter. “That will raise the unemployment number to the mid-5 percent level, and that means there will be that much less money available at retail for people to spend.”

Other companies such as Eastman Kodak Co. are now joining the layoff bandwagon. The world’s biggest photography company said Wednesday it will cut an unspecified number of jobs from its global payroll of 78,400 because of the further deterioration in the economy caused by last week’s events.

But several economists cautioned Wednesday that it is far too soon to know how many people will lose their jobs or how devastating the impact on the economy will be.

“Obviously, layoffs are a drag on the economy,” said Gary Thayer, chief economist with A. G. Edwards, the St. Louis-based investment firm. “But the more important thing is whether they will be offset or cushioned by anything else, and it appears they will be.”

The federal government is stepping up its spending for both national security and rebuilding efforts, which will pump tens of billions into the economy in the next year, Thayer noted.

“The layoff numbers are very large, and so is the size of government spending. I don’t think there will be as much lost purchasing power as the layoff numbers would suggest,” he said.

Diane Swonk, chief economist with Bank One Corp., agrees that layoffs could push the economy into a “mild recession,” but she believes “those affected will be bailed out by the government.”

Others such as cell phone makers, defense contractors and security companies will be enjoying a boom time, hiring thousands, she predicts.

“After we get through these losses, there are some medium-term gains,” Swonk said.

To be sure, nobody is underestimating the short-term impact of this week’s job cuts. People who lose their jobs can’t spend as much, and others who are still working may become fearful enough about their own prospects to rein in their own discretionary budgets.

“It’s a vicious cycle,” explains Brian Wesbury, chief economist with Griffin, Kubik, Stephens & Thompson, a Chicago investment firm. “We have a big drop in consumption, which ends up in layoffs, which lowers incomes, which creates lower consumption.”

Matt Ledford, the assistant manager at the Florsheim Shoe Shop at in Chicago, already is seeing the consumption part of the pattern. “We can feel the pinch,” said Ledford, 26. “A lot of people are not going out to shop at lunch time. They are holding on to their money.”

Ledford says he currently isn’t worried about losing his job, but he is concerned about what conditions will be like next year when he graduates from Loyola University’s business school if things go on as they are. He already is watching friends struggle to find jobs they were trained for at the salary levels they anticipated.

Even before last week’s catastrophe, the U.S. employment situation was far from rosy.

The unemployment rate rose sharply to 4.9 percent in August, due primarily to cutbacks in manufacturing, utilities and transportation. That translates into about 7 million people who were out of work, an increase of more than 1.1 million from the same month last year.

The number of people who were laid off hit 1.1 million in August, according to the U.S. Bureau of Labor Statistics, up from 907,000 in the same month last year.

This week’s layoffs will make the September number eye-popping, economists agree. But some economists and labor union officials are arguing that the numbers may not be as bad as they first appear.

Some of the airlines may be exaggerating the extent of layoffs to get more aid from Congress, they say. Because no one knows how fast the U.S. public will return to traveling, airline executives may be painting a worst-case scenario based on the precipitous decline in travel during the past week.

Indeed, Boeing’s 30,000 layoffs are supposed to occur during the next 15 months. “Those kind of numbers are very tentative,” said A.G. Edward’s Thayer. “The one thing we learned from last week is things can change quickly. We’re trying to tell people not to jump to conclusions. Unfortunately, a lot of people are.”

Many companies that may be laying off workers now may also be hiring them back shortly once regular deliveries of parts and merchandise resume, he added.

One industry that is an obvious target for layoffs -- the investment industry -- may not feel them for quite awhile, experts agree. It would be in bad taste to let go Wall Street traders, brokers and investment bankers who are still recovering from the shock of the World Trade Center disaster, financial sources say.