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Consumer discretionary, industrials topped 2017 layoffs in big states

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Consumer discretionary, industrials topped 2017 layoffs in big states

The consumer discretionary and industrial sectors announced the largest percentage of total mass layoffs in the 10 most populous states in 2017, according to an S&P Global Market Intelligence analysis of discharge notices filed under the Workers Adjustment and Retraining Notification Act.

The federal WARN Act requires employers with 100 or more employees to provide 60-day advance written notice of a facility closing or mass layoff affecting 50 or more employees at a single location. Those who have worked less than six months of the last 12 months and those who work an average of fewer than 20 hours a week are generally excluded from the tally. Each state has a designated office in which federal WARN notices must be filed, and several states, including California, Illinois and New York, have additional notification requirements.

Consumer discretionary companies announced the largest percentage of total layoffs in six of the 10 most populous states — Michigan, Ohio, Florida, North Carolina, Pennsylvania and California — and the second-highest percentage in the remaining four: Illinois, New York, Texas and Georgia. Industrial companies saw the highest percentage of layoffs in two of the analyzed states — New York and Georgia — and the second-highest percentage in six others: Ohio, North Carolina, Michigan, Pennsylvania, Florida and California. Meanwhile, financials, real estate, utilities and telecommunication services announced the smallest percentage of total job cuts across the board.

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Layoff announcements

According to a report released by outplacement consulting firm Challenger Gray & Christmas Inc., U.S.-based employers announced 418,770 layoffs in 2017, the lowest annual total since 1990. Cost-cutting measures accounted for about 45% of the announcements, followed by closings at 25% and restructuring at 15%.

Concurrently, hiring announcements were the highest on record, with employers stating plans to hire more than 1.1 million new employees, a 27% increase from the 868,702 planned new employees announced in 2016, the firm reported.

In periods of high employment, companies try to hold on to their employees and, in some cases, retain workers that they may have otherwise laid off, due to difficulty finding people to replace them, Challenger Gray & Christmas CEO John Challenger told S&P Global Market Intelligence in an interview. Challenger added that the industries most vulnerable to job cuts are those with the highest concentration of unskilled and semiskilled workers, such as retail.

According to the outplacement consulting firm, the shift from brick-and-mortar retail to e-commerce has resulted in U.S. retail companies announcing 76,084 job cuts in 2017, a 28.3% increase from the 59,324 job cuts announced in 2016. Industrial goods also saw among the highest number of job cut announcements, with 34,179 in 2017, a 2.2% increase from the 33,435 job cuts announced in 2016, the firm noted.

Credit health

S&P Global Market Intelligence assessed the credit health of the firms announcing mass layoffs by examining the probability of default, as calculated by its Fundamental Probability of Default model, a statistical model that predicts the likelihood of a firm defaulting on its debt or entering bankruptcy protection over a period of one to five years.

The analysis found that many job cuts were announced by large, financially healthy firms, with one-year probability of default under 0.5%, which is approximately the threshold between investment grade and speculative grade equivalents. Sears Holdings Corp., with a one-year probability of default of 25.37%, and the bankrupt Central Grocers Inc. were among the exceptions.

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2018 outlook

Looking forward, Challenger said 2018 may see an uptick in layoff announcements as companies realign with consumer demand. Uncertainty surrounding tax and healthcare legislation, in conjunction with the tight labor market, may have kept employers from making long-term staffing decisions in 2017, he said.

"It remains to be seen what impact the tax bill will have on companies, especially to what benefits companies offer or change," Challenger said. "For instance, as healthier individuals leave the [health insurance] exchanges, will the cost burden shift to employers? Will this cause employers to make up the difference through layoffs?"

Challenger added that as companies adapt to a deregulatory environment, job cuts may be a way for employers to bring higher shareholder returns.

Mrinal Vij and Ishita Mishra contributed to this analysis.

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S&P Global's Fundamental Probability of Default Model provides a fundamentals-based view of credit risk for corporations by assessing both business risk — including country risk, industry risk, macroeconomic risk, company competitiveness and company management — as well as financial risk, such as liquidity, profitability, efficiency, debt service capacity and leverage. For a more thorough review of the model, refer to the PD Model Fundamentals - Public Corporates white paper.