Big layoffs, slower recovery

A recent article in The Wall Street Journal had an interesting message on the recovery of companies that made drastic cutbacks during the recession.

Some went too far, it says.

Companies that made across-the-board layoffs and severely cut their operations when faced with falling revenues may face a slower, more difficult recovery, even as the economy improves.

The article quotes corporate analysts who say companies that take “a limited and more targeted approach to layoffs” tend to do better in economic recoveries than those that sharply slash jobs.

“You can’t shrink your way into prosperity,” Wayne Mascio, a business professor at the University of Colorado at Denver, is quoted as saying.

Mascio studied how companies in the Standard and Poor’s 500 index performed in the last 18 years. Companies that cut the deepest in their sectors had smaller profits and weaker recoveries for up to nine years after a recession, he found.

The article noted the case of Honeywell International Inc., which “decimated” its industrial base in the early 1990s by laying off one-quarter of its work force, canceling products and scaling back its global-expansion goals.

Call it lessons learned.

During the latest recession, when its profits dropped nearly 25 percent, Honeywell took a different approach. It used furloughs and benefit cuts to limit layoffs to just 5 percent of its workforce. At the same time, it introduced 600 new products rather than shrink its product list.

Now, with the economy improving, Honeywell is seeing increased revenues and has upped its profit forecasts for the rest of the year, the Journal reports.

Certainly, many companies had little choice but to make deep cuts when faced with tumbling revenues. And some industries were especially hard hit and struggled to survive.

But the Journal’s report suggests that for some companies at least, there may have been better options.