Even as the gross domestic product has surprised on the upside, the emerging profits picture points to coming layoffs.
Although earnings levels and margins have deteriorated over the past year or so, business has largely avoided staffing cuts. Indeed, companies have continued hiring. It seems that despite slowing sales and output levels, managements are hoarding labor, haunted perhaps by the staffing shortages that plagued their ability to recover quickly after the COVID-19 lockdowns and quarantines lifted in 2021. Profits have suffered under the weight of these additional wage and salary costs.
Such patterns can’t go on indefinitely. With profits falling again in the spring quarter, such hoarding should end soon. Then, layoffs will begin.
As yet, only a little hard information on April–June earnings was available. Company managements have offered guidance, however, and all points to shrinking profits. Estimates on the companies in the S&P 500 Index suggest an 8.1 percent drop in earnings per share from the spring quarter of last year, a striking figure since last year’s second quarter was weak enough to make even mediocre returns look good by comparison. Taking account of the decline in shares outstanding from buybacks and the like, this per-share expectation suggests an 11.4 percent drop in net earnings.
Estimates, of course, are often too pessimistic. Managements tend to lowball their public guidance so that they can ultimately deliver a pleasant surprise to analysts and investors. But their guidance is never so skewed from reality that an expectation of this kind of a decline could, in the end, show growth or even a flat performance compared with a year ago.
What is most telling as far as employment is concerned is the expectation that second-quarter S&P 500 per share revenues are also expected to fall by just under 1 percent. Given the difference between this figure and the expected earnings decline, it looks as though profit margins suffered markedly. This result stands to reason. Especially when business is hoarding labor, as seems to be the case, it carries a considerable cost overhang that gives any revenue decline considerable leverage on the bottom line.
The clarity in this matter emerges from the Labor Department’s staffing and productivity accounting. Here, the effect of labor hoarding becomes obvious. Output growth clearly has slowed. Production rose by only 2.2 percent last year and at a 0.9 percent annual rate during this year’s first quarter, the most recent period for which data are available.
Yet staffing, as measured by hours employed, rose by 3.9 percent last year and at a 2.7 percent annual rate in the opening quarter. Productivity—output per hour worked—has accordingly plummeted, falling by 1.6 percent last year and at a 1.7 percent annual rate during the first quarter.
The pressure implied by this situation has already moved technology firms to begin laying off staff. The same is true of white-collar employment in general. Meta, for example, actually began its cost-cutting last fall with the layoffs of 11,000 workers, erasing the entire 2021 hiring boom. This past March, Meta management laid off another 10,000 workers.
Google in January announced its intention to cut staffing by 12,000. Amazon more than matched these actions, announcing layoffs of 18,000. The auto industry has already made job cuts of almost 31,000. Citigroup, Intel, HP, Microsoft, Johnson & Johnson, Phillips 66, and Disney have also made layoff announcements.
Strong rates of aggregate payroll growth recorded at the same time imply that hiring elsewhere more than made up for these moves, but the continued weak profits picture suggests that the pressure will tip those hiring now in the direction of these leaders.
Even the Labor Department’s otherwise positive June report carries hints of this developing pressure—straws in the wind, so to speak. Goods-producing industries hired some 29,000 in June—not a bad showing but considerably lower than the 50,000 recorded this time a year ago. Services firms hired 120,000—again good, but less than half the 332,000 of a year ago. Were it not for a sudden boom in health care and education hiring, services would have shown very little payroll growth at all. Wholesale trade, retail trade, and warehousing all cut payrolls in June.
And there’s no reason to expect a sudden pickup in economic activity that might fully use these excess payrolls and so save profit margins. The Federal Reserve continues to raise interest rates and promises to keep rates high for a while. Europe is in recession, and news out of Asia shows that China is facing economic problems. In the absence of such an unlikely rescue from surging economic activity, U.S. businesses will continue to face disappearing profits and take cost-cutting actions as a result. Those actions will inevitably include layoffs.
