The Layoff Domino Effect

Nov. 21, 2008— -- It started with real estate then spread to Wall Street. Now as the U.S. economy lurches into what appears to be a long recession, just about every American worker is at risk of being fired.

"I'm not trying to sound ghoulish … but these are going to be difficult times. I think there is no question about it," said Lawrence J. White, an economics professor at New York University's Stern School of Business.

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As one industry topples, it ends up putting pressure on many others, leading to a domino effect of job losses.

When home values plunge, Americans lose wealth or at the very least their sense of wealth.

"It's going to affect their spending. They feel less wealthy. They can't use their house as an ATM or piggybank," White said. "People will eat out less. They will tend to splurge less. They will be more cautious with their spending."

That means cooking at home instead of heading out to the local diner or renting videos instead of going to see the latest blockbuster at the multiplex down the road.

In turn, the waitress in that diner earns less in tips and has to cut back her own spending. And that movie theater decides to fire two workers because ticket and popcorn sales are down.

In the first 10 months of this year, 1.2 million American jobs have been eliminated. More than half of those came in just the past three months, according to the Labor Department. The nation's unemployment rate spiked in October to 6.5 percent, the highest level in 14 years.

And Thursday brought even more bad job news: new unemployment claims filed jumped to 542,000, the highest since the summer of 1992 when the nation was recovering from a recession. And that's just the new claims. The overall number of people now receiving unemployment benefits is more than 4 million.

Every single sector of the economy has lost jobs except for health care and education and even they are showing signs of weakness.

"I suppose the 435 members of the House of Representatives and the 100 members of the U.S. Senate may be immune from this. They still have their jobs. They still have their salaries and presumably they'll still have their staffs," White said. "Everybody else, we're looking at difficult times."

Financial Crisis Affecting Jobs

The first victims of the financial crisis were those directly connected to the real estate market: mortgage brokers, real estate agents and home builders. Next up were related companies such as Home Depot. As home equity credit lines started to dry up, fewer homeowners had the free money to make renovations, taking down contractors and trade people.

Then the bottom fell out on Wall Street. Banks and investment firms started to add up their losses on mortgages and mortgage-backed investments. Losses mounted, firms went under and jobs were lost across the financial sector.

For instance Morgan Stanley has cut roughly 10 percent of its workforce this year and another 2,000 to 2,500 job losses are expected there before the end of the year. Citibank will cut 50,000 jobs. Fidelity Investments recently announced that it will lay off 1,300 employees and American Express made similar cuts.

The loss of many of those high-earning jobs has its own ripple effect. Investment bankers had to cut back on everything from fancy lunches to expensive cars and pricey clothing. For instance, some New York nightclubs stopped selling $300 bottles of vodka to free-spending customers. There simply wasn't enough demand any more.

Those restaurants, bars, clothing shops and auto dealers all are then forced to layoff workers to cut costs. Those workers then buy fewer goods and the cycle continues.

There are several factors making the situation even worse today.

First, the three major U.S. automakers -- long troubled -- say they are on the verge of bankruptcy. Such a collapse would have a major impact on the U.S. workforce. Everybody from car dealers to parts suppliers would feel the pain.

There are some companies that are still healthy, to be sure. But because banks are hesitant to loan money, they too are suffering. Healthy companies that want to expand can't get a loan to build, say a second or third assembly line. Without that extra line, they have no need for extra workers.

Finally, falling stock prices have shriveled most American's retirement and savings accounts leaving them with less money to spend or at least a feeling about being broke. Consumers who feel poor or fear losing their job -- even if they haven't -- are less likely to spend money on vacations or might scale back Christmas gifts.

Slower Economy

That's not good news for companies such as electronics retailer Circuit City. The company has already filed for bankruptcy and cut nearly 7,000 jobs as it closes stores. Also reflecting decreased consumer demand for electronics, chip maker Advanced Micro Devices is cutting 500 jobs.

Fewer goods purchased also means less work shipping them.

For instance, shipping company DHL is cutting its U.S. operations. And Neptune Orient Lines, a container-shipping company in Singapore, just cut 1,000 jobs in North America, about 9 percent of a its global workforce.

A slower economy also means less businesses and individuals making phone calls. Qwest Communications plans to cut 1,200 jobs. And Yahoo plans to cut 1,500 jobs, in part reflecting an advertising decline in newspapers, television, radio and the Internet.

Finally, government tax collections are down, forcing them to reduce services and jobs.

"Local school boards," White said, "are realizing that they have less money to spend and they will cut back."

Where will it all end? No one knows, but many think it's likely to get worse before it gets better.