American workers: Brace yourselves. More pink slips might be on their way.
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August's rise in the unemployment rate, to 4.9% from 4.5% in July, hinted that the worst may not be over. On Friday, investors reacted by pulling out of stocks -- even though unemployment is only slightly above the 30-year low of 3.9% that occurred in 2000.
But such concern about the economy might be merited, suggests John Challenger, chairman of outplacement firm Challenger, Gray and Christmas. Unemployment has risen as high as 10.8% during other economic downturns, he says, and his firm has tracked a record-setting 1.2 million layoff announcements so far this year.
TSC: Were you surprised that the unemployment rate announced Friday reached 4.9%?
Challenger: Yes, it was a startling jump because the unemployment rate has only moved incrementally by one-tenth or so each month over the last several years. Occasionally, it has jumped by two-tenths. So, it's shocking for the rate to rise by four-tenths of a percent in one month.
On the other hand, I've been sensing a tremendous amount of pressure at companies to lay people off. We track announced layoffs, and so far this year, firms have announced 1.2 million layoffs -- an unprecedented level. And it's continued unabated. In 1998, companies announced that they would lay off 677,000 workers. American companies seem to be in a layoff frenzy.
TSC: Do you expect the unemployment rate to rise even further?
Unemployment swelled to 7.8% in May of 1992 following the 1991 recession. In fact, we reached 10.8% in 1982.
The ties that bind companies to people today are much looser than they were during other downturns. In the 1990s, we've moved into an era of just-in-time employment. With companies expressing much more cavalier attitudes towards employees, you have to wonder what that might mean for unemployment.
TSC: So, then, at 4.9%, is the unemployment rate actually rather low?
Relatively speaking, yes. Unemployment reached a low in 2000 that most economists never even thought was possible. It sank to 3.9% a couple of times in 2000. That's the lowest it's been in the past 30 years.
So, if you'd told people five years ago that unemployment was 4.9%, people would have stood up in the rafters and cheered. But what's disconcerting
now is the swift acceleration of layoff announcements and the rapid deceleration in GDP growth to an infinitesimal level just above zero. This month, it feels like the dams have broken loose.
TSC: Can you predict how high unemployment might get?
That I don't know. But I can tell you that in the past two recessions, companies were much more resistant to letting people go than they are today. The high-tech area, especially, has little compunction towards letting people go. There also are fewer people in today's workforce with long tenure and more companies experiencing volatility.
With Wall Street and shareholders driving these public companies to keep their earnings up, more companies are likely to prop up earnings by cutting payroll and compensation costs rather than worrying about the long-term interest of the company.
TSC: Why have consumer spending and confidence held up so well throughout all of these layoffs?
So far, unemployment has actually been low and search times have averaged only about two months, compared with an historical average of three months. And a lot of people have been rotating out of the tech, computer, electronics, telecom and manufacturing sectors into the service, health care, energy and housing sectors, strong areas of the economy where it's possible for people to find new jobs. We see about 40% of the people changing industries today.