The Growing Trend Of Profitable Firms Firing People (AA)(IBM)

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It would be hard to miss the headline that Alcoa (AA) fired 15,000 people yesterday. The actions of big companies are probably a much better indicator for what is ahead for the economy than forecasts from business professors.

The fascinating and troubling aspect of the Alcoa cuts is that the company made $470 million in the last reported quarter and Wall St. estimates have it making a very modest amount of money this year. Dow Chemical (DOW), which recently let thousands of people go, also is a money maker. One of the most successful corporations in the US, IBM (IBM) is rumored to be a week away from cutting more than 10,000 people. IBM may have as good a balance sheet and earnings stream as any American public company.

Challenger, Gray reports that big companies had 166,348 layoffs in December, up 275% from a year. A look at their reports for the first 11 months of the year shows that many cuts came at firms which were doing well like Hewlett-Packard (HPQ)

While it would be a mistake to take too much from CEO forecasts and predictions, obviously executives at companies which span almost every major industry are cutting costs and personnel. No one needs to show that it is a vicious circle for the broader economy. A man without a job is a man who spends nothing. The same is true of a business that folds.

Wall St. analysts are still posting earnings forecasts that show many large companies making a lot of money next year. Expectations are that IBM’s earnings per share will rise from $8.71 in 2008 to $8.99 this year. If someone could make it through security at the company’s headquarters and get the straight dope from the tech company’s CEO Samuel J. Palmisano, he would certainly say that anyone who believes those forecasts belongs in a state mental institution.

By most measures, the American economy lost between 2 million and 2.5 million jobs last year. As that number rises sharply this year, the IBMs cut as many people as the GMs. That says more about what the second half of the year looks like than any other set of numbers laying around.

Douglas A. McIntyre