Lay off the layoffs

Good morning friends and readers!

One of the tough things about tough times is seeing the endless parade of job layoff numbers. They create lots and lots of anxiety amongst people. I know because when I was growing up my mom experienced layoffs on multiple occasions. I also know people who have been personally laid off during our current recession. Layoffs are never pleasant.

What I wanted to point out though is that even given the large layoff announcements that have been occurring, unemployment in the United States remains at a fairly low 6.5%. This is the highest level in 14 years (source: Labor Department & Wall Street Journal). However, this rate is still well below the unemployment levels for most other countries throughout the world when their economies were at their peaks.

The danger that I wish to highlight is that layoff notices frequently occur in bunches, and the numbers are typically large and in the thousands, and they come from very well-known businesses. Because they come from well known businesses the subtle effect on our psyches goes something like, “If a big company like Citigroup is struggling, things must be very bad out there.” The constant drone of these notices can become very depressing, can’t they? However, this is asymmetrical data. Huh, what’s that mean? It means that at the same time Citigroup is laying off 30,000 employees, they are still hiring. What is more, other businesses are constantly in a state of hiring, but when do you ever see press stories announcing such things? The answer is that you never see data like this and that leads to perceptions of doom and gloom frequently being out of proportion with the actual state of things. In other words, the qualitative idea of layoffs outstrips the quantitative reality of layoffs. More on this in a moment.

So why don’t we get figures from businesses that show their level of hiring? The answer is that layoff notices by companies are not designed for the general public, but for the investing public. Companies announce layoffs because they want to announce to their shareholders and other stakeholders that they are cognizant of operating inefficiencies at their businesses; that they are aware of their operating environments; and that they are doing something about it. That’s why you see the result that some stocks will rally when layoffs are announced at the business. Investors in the equity of the business are heartened that a bloated company is going on a diet…so to speak. On the flip side, investors generally are not cheered by job hirings as they are seen as part of the daily functioning of a business and nothing to get excited about. This is why news of layoffs is asymmetrical.

Now another important point about layoffs, and one admitted to by many business executives is that the number of people to be fired in layoff announcements is almost always higher than the actual number that are eventually fired. Why is this? Layoff announcements are designed in part to trigger the marginal employee, the unhappy and, consequently probably non-productive, employee to leave before they get fired. That looks better on the resume. When I first entered the investment business over a decade ago this was interesting news to me, because I had the general public view of layoff announcements. Namely, that the numbers quoted actually correspond to actual firings. They do not. The other reason that the reported planned numbers of layoffs is higher than actual is that most businesses cannot simply start laying off folks without tremendous amounts of planning taking place. Otherwise businesses would take the chance of causing major disruption in their operations and during economic times when they are more vulnerable to bad decisions. Thus, businesses will frequently exit recessionary times before all of the layoffs ever took place. Does this make sense?

So the point in all of this is to lay off the layoff notices because the shear quantity of them is misleading and are not a direct reflection of the state of the economy. The numbers to pay attention to are the unemployment rate and the number of jobs added to, or subtracted from, the economy. For those of you who have lost your jobs – I am very, very sorry and know first hand how difficult that can be. For those who have not lost your jobs: lay off the layoff notices.

Sending prosperity wishes your way!

Jason