Sunday, February 4, 2001
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Posted on: Sunday, February 4, 2001

Large-scale layoffs raise worries of domino-like effect on economy

Associated Press

In recent days, a parade of companies has marched out plans for tens of thousands of job cuts.

The worry now is about a domino effect - how much growing uncertainty among workers will cut into consumer spending, which in turn could threaten the nation’s fragile economic health.

"The risk here is self-fulfilling prophecies, and that’s a very real problem," said Louis Crandall, chief economist with Wrightson Associates LLC in New York. "(Consumer confidence) really is the weak link. This is where problems that really could be transitory could turn into a more persistent downturn."

That potential was demonstrated last week in a report showing a steep drop in the Consumer Confidence Index - to its lowest level in four years - largely because of increasing worries about job prospects.

Economists are divided on how much the layoffs will temper the consumer optimism that has been a key to the nation’s long boom. Some even label the job cuts as the bitter medicine the economy must swallow to get business back into robust shape.

"In a personal sense it hurts, but in a macro sense, it is the action we’ve got to take to remain competitive," said Joel Naroff of Naroff Economic Advisors in Holland, Pa. "Ultimately, the adjustments that the economy is making is going to set us up for the next strong period of growth."

It’s not difficult, though, to find those who disagree and say companies could harm themselves by firing the people who buy their products, potentially damaging the economy in ways not easily rectified with an interest-rate reduction or a tax cut.

"If you think that your job is going down the tubes, how much more likely are you going to be to take out a big loan, even if you’re able to do so at very favorable terms?," asked Jared Bernstein of the Economic Policy Institute, a think tank funded partly by labor. "If the rate of layoffs continues to increase, I expect the damage to consumer confidence will be considerable."

Such concerns don’t seem to be worrying some of the nation’s largest employers. In just a few hours one week in January, Black & Decker Corp., Brunswick Corp., J.C. Penney Co., Sara Lee Corp. and Standard Register Co. announced they would collectively eliminate nearly 16,000 jobs.

Those cuts matched Lucent Technologies Inc.’s plans for 16,000 layoffs announced earlier, and are dwarfed by the revelation from DaimlerChrysler AG that it will ax 26,000 jobs over the next three years.

Analysts say the cuts demonstrate the most unforgiving rule of the New Economy - that corporate concerns about stock performance are paramount. A slowdown in the economy can provide the cover companies need to make cuts.

"If they are considering a downsizing or a restructuring, companies find it better to do so at times of economic weakness and sidestep the resentment," Crandall said.

But workers may be less understanding.

The last time the U.S. economy slid from growth into recession, in early 1990, the Consumer Confidence Index plummeted as the nation’s unemployment rate climbed.

But 1990 was a very different time economically, Crandall said. The U.S. government reported a net loss of more than 200,000 jobs in July 1990, a hemorrhage that continued for the next 10 months.

There are no problems of that magnitude this time around, and the U.S. economy continues to create more jobs than are being eliminated. But economists say what matters is how consumers view the situation. Some suggest that workers have become more used to layoffs than they were a generation ago.

"Rightly or wrongly," said economist Paul Kasriel of The Northern Trust Co. in Chicago, "people do seem to have confidence in Greenspan’s ability to pull the rabbit out of a hat."

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