Why "Healthy" Companies Cut Jobs in a Recession

Last Updated Jul 28, 2009 7:20 PM EDT

We all know times are hard, but most people don't really understand the broad, ripple effects of recessions, especially a "once every 50 years" financial crisis like the one we're in now. Most recessions are centered on specific market segments - like tech or housing. But this one seems to have dragged every market and every company into the fray, even the "healthy" ones.

Here's an example:

Just today Verizon announced what, for most companies, would be a stellar quarter. Profits declined from $1.9 billion to $1.5 billion while revenues rose about 2 percent (11 percent if you include the Alltel acquisition), versus the same quarter last year.

Looking at the big picture, the company added 1.1 million subscribers during the quarter and the quarterly profit number, while down year to year, was about "average" for Verizon, which typically earns about $6 billion a year as of late, give or take 10 percent.

And yet, the company announced it will cut 8,000 jobs, or about 3 percent of its workforce, on top of similar cuts last year.

So what gives? Why do seemingly "healthy" companies also cut jobs in a major recession? Well, it's all about managing risk to the bottom line.
Look at it this way: when you're physically threatened, you brace for impact. Blood flows from your extremities to protect the vital organs. Then you wait to see what happens. If something happens, you're safer. If not, you go on our merry way. But make no mistake; there are repercussions from the event. The stress and strain is measurable and, over time, takes its toll.

As human constructs, companies and even entire markets behave pretty much the same way: You lose your job and can't afford a new cell phone or a better plan, so Verizon buys less from its vendors, everybody in that food chain cuts jobs, and that brings us back to the beginning. It's like a giant flywheel that feeds on itself.

Except in a serious financial crisis, like the one we're in now, it's the same effect in pretty much every market: automotive, food, clothing, energy, electronics, housing, telecom, you name it. As a result, every individual, family, and company is on alert and braced for impact. And that even includes the relatively healthy ones.

The cynical among you might say CEOs are protecting their bonuses. That may be true, but the bonus targets are usually derived with corporate health and shareholder wealth in mind. Like it or not, that's the way the system works.

Anyway, sooner or later we start to see indications that a few of the flywheels are slowing down, indicating the beginning of a recovery, although each flywheel recovers at a different rate. For example, a recovery in consumer staples may precede a recovery in luxury items.

Eventually, it's good times again. I know, I can't wait either.