There are two ways to look at this week’s announcement that DaimlerChrysler is retrenching operations and laying off 20 percent of its workforce by 2002. On the one hand, it is another move by an auto manufacturer that has had trouble responding to a rapidly changing market. On the other, it reflects the slowdown in the U.S. economy. More layoffs are expected as American businesses brace for a tough future. The chief danger is that those moves will create a vicious cycle: Job cuts will depress consumer confidence, which will cut spending, which will trigger more cuts and exacerbate the length and severity of the downturn.
Chrysler was the smallest of the three U.S. manufacturers and no stranger to hard times. In 1978, it took a $1.5 billion U.S. government bailout to save the company from bankruptcy. Labor and management put aside their grievances to turn the company around. They cut costs and overhauled the product line. In the process, Chrysler became the industry leader in per-vehicle profits and was able to repay its government-guaranteed loans seven years early.
But Chrysler’s respite was only temporary. Within a decade the company was looking for a partner. It found one in Daimler-Benz, and in 1998 the two companies created DaimlerChrysler, “a merger of equals.” While executives may have genuinely expected the two companies to work on a par, the imbalances became quickly apparent.
Chrysler continued to hemorrhage money. Virtually all of its top executives were replaced by German officials in an attempt to stem the tide of red ink, but even that failed. The company lost $512 million in the third quarter of this year, and analysts expect fourth-quarter losses to exceed $1.2 billion. Last month, DaimlerChrysler announced that it had used up its cash reserve of $5.5 billion because of acquisitions and losses at Chrysler.
That grim situation prompted this week’s move. The company will slash annual production by 15 percent and close six factories in North and South America, cutting 26,000 jobs in the process.
DaimlerChrysler is not the only company that is trimming its work force. Online retailer Amazon.com said Tuesday that it would lay off 1,300 employees. In the last month, companies ranging from AOL Time Warner to Xerox have announced cuts, and other U.S. automakers are also trimming payrolls.
U.S. companies are preparing for the slowdown that is on the horizon. Job cuts are designed to create the lean, mean companies that will help keep them competitive during tougher times. In other words, the U.S. is embarking on another wave of corporate restructuring, and layoffs will continue.
It is important to keep these moves in perspective. Currently, over 135 million people are employed throughout the U.S. economy, and 275,000 workers lose their jobs involuntarily each week. The U.S. unemployment rate stands at 4 percent, but the slowdown is expected to increase it to 4.5 percent or 5 percent by the end of this year. While that would still be a historically low level, it would mean that 500,000 to 1 million more Americans would be without work.
Equally important, layoffs do not mean that workers are thrown out on the street. Job cuts are spread over time and are often the result of attrition and early retirement. Given the labor shortages in some parts of the economy and the dynamism inherent in the U.S. model of capitalism, finding new work should not be too difficult.
That matters. The danger of corporate restructuring is that consumers will over-compensate for fear of being out of work for long periods of time. A big decline in spending could turn a mild recession into a plunge. There are already warning signs. The Conference Board’s closely watched confidence indicator fell in January to the lowest level in four years. The 14-point drop was the biggest one-month decline since the beginning of the 1990-91 recession.
Now all eyes are on the U.S. Federal Reserve Board, which meets Wednesday. After Chairman Alan Greenspan testified in Congress last week that U.S. economic growth is “very close to zero,” the Fed is expected to cut interest rates a half point to 5.5 percent, although the plunge in consumer sentiment could produce a still bigger cut. While he has long sought to slow down the red-hot U.S. economy, Mr. Greenspan and other members of the Fed are now concerned that the country has shifted gears too abruptly. The Fed will try to cushion the impact, but there is little margin for error. As workers at DaimlerChrysler and other companies now know, things are out of Mr. Greenspan’s capable hands.
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