Layoffs: Short-Term Profits, Long-Term Problems

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By now, "most of these job cuts should be complete," says Alan Gayle, senior investment strategist at RidgeWorth Investments. Layoffs make sense when they're a proactive effort to deal with a new economic environment, he says. If a company is continuing to cut jobs in order to meet profit targets, it could be a sign of serious problems with its business model, Gayle argues.

There is evidence companies are slowing their layoffs. Initial jobless claims hit a 17-month low of 433,000 during the week of Dec. 26, down from a peak of 674,000 in March.

There is also evidence that some companies may even start hiring. Caterpillar (CAT) cut about 18,700 full-time jobs in the past year. But Jim Owens, the chief executive of the construction equipment maker, told Bloomberg TV in December that he expects to rehire laid-off workers in 2010. "We'll gradually begin to call people back and to rebuild our overall sales and ability to ship product," Owens said.

Cautious Hiring

Still, many companies look likely to delay hiring as long as possible. "Companies are being cautious in their hiring," says Michael Yoshikami, president and chief investment strategist at YCMNET Advisors. "And, given [the] economic challenges ahead of us, I think that's wise."

Alcoa (AA) has cut about 21,500 jobs since June 2008. Those layoffs netted Alcoa $325 million in cash savings last year, and another 3,100 job cuts are planned, Alcoa Chief Financial Officer Charles D. McLane Jr. said Jan. 11.

Alcoa is less optimistic than Caterpillar about rehiring workers. "We estimate that 75% of these positions are permanent reductions and therefore sustainable," McLane told analysts.

In 2009, companies slashed jobs en masse. But this year they're dealing with the consequences, as widespread unemployment takes a serious toll on the economic recovery.

The massive job cuts of the past year may also have political implications. In 2010, many large U.S. companies could continue to show healthy profits, especially from overseas sales. That wouldn't look good to many Americans.

You could see "these companies doing well but many Americans struggling," Smith says. "I don't think this is going to sit well with politicians." As a result, the threats of higher corporate taxes could increase.

Some worry that companies cut too much during the downturn, eating into future growth prospects—such as research and development budgets—or sapping their ability to take advantage of a robust recovery. "You just have to trust that management is cutting what they should," says Morris. It could be a long time before the success or failure of the radical surgery is apparent.

Steverman is a reporter for BusinessWeek's Investing channel.

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