Pink-Slip Virus Infects Once-Immune Job Market

In the not-too-distant past, job cuts were seen largely as a dot-com phenomenon and occasioned a good deal of snickering. The black-turtlenecked uber yuppies, who so recently had been crowding the sushi bars and bragging about their weekend trips to Costa Rica, had finally found out what comes of hubris. Icarus has fallen into the sea -- put another tick mark on the layoff tracker.

But lately, rising job cuts have become an economywide phenomenon, and suddenly people not knowing where their next paycheck will come from doesn't seem so hilarious anymore. U.S. employers announced plans to cut 133,713 jobs in December, according to Challenger Gray & Christmas -- the most the outplacement firm has seen since it began tracking layoffs in 1993. And the job-cut announcements haven't abated in January.

In just the past few days, AOL-Time Warner (AOL Quote) said it would cut upward of 2,000 jobs. Lucent (LU Quote) set plans to slash 10,000.

Meanwhile, Norfolk Southern (NSC Quote) said it would cut 1,000 to 2,000 jobs, and DaimlerChrysler (DCX Quote) is expected to announce plans soon to cut 6,000 white-collar jobs and 15,000 manufacturing jobs at Chrysler, according to The Wall Street Journal. (The carmaker already has laid off 250 hourly workers in Detroit.)

Although the unemployment rate remains at 4%, near a 30-year low, the increased layoff activity suggests that it will move higher in the months to come.

Reversal?

"We've created a just-in-time employment system wherein we watched the unemployment rate drop down far below what anyone thought was possible," says Challenger Gray & Christmas CEO John Challenger. "Now, the risk is that it can do just the opposite; it can go leaping back up as companies in unison all decide they need to cut back."

Most economists don't expect such a dramatic reversal. They note that because of structural changes in the economy -- jobs continuing to be redirected away from manufacturing and toward services, for instance -- the normal level of layoffs in the economy has risen. Moreover, the job market has a new kind of flexibility wherein companies are more likely to cut back hours worked, cut temporary workers, or cut bonuses rather than resort to firings. Still, although all this might soften the blow to the workforce, there will be a blow nonetheless.

"The recent acceleration in layoffs is not just structural change," says Lehman Brothers senior economist Ethan Harris. "It's now cyclical, and it's reflective of a much softer job market."

As unemployment rises, and as workers worry about their job security, consumer spending will likely come under further pressure. That pressure may remain even after economic growth begins to pick up again, because employment tends to lag the economy.

Long Road Back

"It's hard to see how you're going to have too much of an elevation in consumer spending" even after the economy reaccelerates, says Morgan Stanley Dean Witter chief U.S. fixed-income economist David Greenlaw.

The number of high-profile layoffs also could make it harder for the Federal Reserve to get the economy back onto more stable footing.

"Right now, the Fed is really trying to engineer a quick recovery by getting confidence to rebound," says Harris. "If you're reading in the paper every day about another big layoff, it gets into the psychology of workers. This is one of the biggest risk factors to the recovery."