Tech Trouble As Microsoft, Intel Announce Layoffs

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Microsoft, a component of all three major stock indexes, said business is so bad, it must cut 5,000 jobs over the next 18 months. That marks the software bellwether's first major round of layoffs in its history. Earlier this week, Intel also announced 5,000 cuts — not good news for the tech sector.

MICHELE NORRIS, host:

From NPR News, this is All Things Considered. I'm Michele Norris. First this hour, the economic downturn has hit one of the most successful companies in history - Microsoft. Today Microsoft announced plans to eliminate 5,000 jobs, the first major layoffs in its history. And 1,500 of those employees were told to pack their bags today. From Seattle, NPR's Wendy Kaufman reports.

WENDY KAUFMAN: Rumors of layoffs at Microsoft have been swirling for weeks, so the layoffs, though unprecedented, were not a big surprise. What was surprising was how quickly things deteriorated in the company's revenue and profit picture. In its quarterly earnings released today, Microsoft said its revenue of more than $16.5 billion was $900 million below the company's own expectations. Net income was down 11 percent from a year ago, and the company said the outlook for the next year or two isn't pretty. In a conference call with analysts and reporters, Microsoft CEO Steve Ballmer said the perspective should not be one of recession.

(Soundbite of Microsoft conference call)

Mr. STEVE BALLMER (CEO, Microsoft): What I would say, rather, is the economy is resetting to a lower level of business and consumer spending that's based largely on the reduced leverage in the economy.

KAUFMAN: In addition to job cuts totaling more than five percent of its current employee base, Microsoft is making big cuts in its vast contract worker ranks. Staff hiring will continue in certain areas, including online search where Microsoft continues to trail Google. Microsoft says it expects total employee headcount will be two to three percent lower by the middle of next year.

As CEO Ballmer noted, lower PC sales are a big problem for the company. Analyst Matt Rosoff of the independent research firm Directions on Microsoft points out that the company was caught off guard by the decline.

Mr. MATT ROSOFF (Analyst, Directions on Microsoft): Microsoft actually expected that PC sales would continue to grow in the fourth quarter of last year compared with the previous year. That obviously didn't happen. And because Microsoft earns so much money from Windows, which ships on over 90 percent of PCs, when PC sales slow down, Microsoft slows down.

KAUFMAN: Chipmaker Intel is also feeling the pinch. Just yesterday, the company said it would cut up to 6,000 jobs, more than six percent of its workforce. But Microsoft has another big problem - the boom in so called Netbook computers, small inexpensive machines. Mary Jo Foley, the editor of ZNet's All About Microsoft Blog explains that Microsoft's revenues and profits could be squeezed if it has to sell its operating system to Netbook computer makers for substantially less than it would charge a traditional PC maker.

Ms. MARY JO FOLEY (Editor, All About Microsoft Blog, ZDNet): They've always been able to always count on increasing the amount of money they charge PC makers for every new release of Windows that comes out. But, say, if a Netbook only costs $300, you can't go to a PC maker like an Acer and say, OK, we want $100 for Windows when the whole PC only costs $300.

KAUFMAN: Microsoft's quarterly earnings were a big disappointment to financial analysts. Many were expecting, or at least hoping, for even bigger job cuts. And there was something else Wall Street found troubling. Citing the volatility of market conditions, the company said it would no longer offer predictions for its revenue and profit. Wendy Kaufman, NPR News, Seattle.

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Jobs, Housing Battered; Microsoft Sets Layoffs

A Microsoft sign at a company office in Herndon, Va. i

Microsoft said it plans to cut 5,000 jobs over the next 18 months amid a drop in profits. AFP/Getty Images hide caption

itoggle caption AFP/Getty Images
A Microsoft sign at a company office in Herndon, Va.

Microsoft said it plans to cut 5,000 jobs over the next 18 months amid a drop in profits.

AFP/Getty Images

It's Your Recession

We're just blogging it ...

Any hope for better economic news at the beginning of the new year were dashed Thursday with fresh data showing that the collapse in the housing and labor markets continues unabated. Claims for unemployment benefits jumped to a seasonally adjusted 589,000 in the latest week, and Microsoft announced it is cutting 5,000 jobs.

Home construction plunged to an all-time low in December, capping the worst year for builders in a half-century.

The Commerce Department reported Thursday that construction of new homes and apartments plunged 15.5 percent to an annual rate of 550,000 units last month. Economists had predicted as many as 610,000 new home starts.

In 2008, builders broke ground on fewer than 1 million new homes, also a record low. That marked a 33.3 percent fall from a year earlier.

Meanwhile, jobless claims for the week rose 62,000 to 589,000 — far above expectations — as employers continued to cut jobs at a furious pace.

Unemployment is now at a 16-year high of 7.2 percent. Many economists predict the unemployment rate could reach double digits in the near future, matching jobless rates not seen since the early 1980s.

A 'Horrible' Picture

"These figures are horrible. What can you say? Pick an adjective: terrible, horrendous, disastrous. They all apply," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y.

The Obama administration and congressional allies have proposed the largest public-spending program since World War II in the hope it can help break the economy from the recession's grip, although some Republicans have raised concerns about the size and scope of the plan.

A key tenet of the package, Obama has said, will be reducing the number of foreclosures across the country and increasing credit access to consumers.

No Quick Fix

During his Senate confirmation hearing Wednesday, Treasury Secretary-designate Timothy Geithner said the package probably would not be delivered for several weeks, signaling that the administration hopes to deal with the economic crisis in a systematic way instead of responding on a case-by-case basis.

"We're at the beginning of this process of repairing the system, not close to the end of that process," Geithner told the Senate Finance Committee. "And it is going to require much more substantial action on a very dramatic scale."

It remains to be seen how long the financial system will remain stable enough to keep from forcing the new administration's hand.

Fear of a wider banking collapse has grown in recent days, with signs that losses at major U.S. and foreign banks are deepening.

Low Rates Not Enough

The Federal Reserve has taken a number of extraordinary steps in the hopes of providing some economic relief. It is buying up certain types of mortgages and has slashed a key interest rate to a record low of between zero and 0.25 percent.

As a result, mortgage rates have dropped to the lowest level in decades in recent weeks, although that does not appear to be drawing enough new buyers into the housing market.

Also on Thursday, Microsoft Corp. stunned investors with the announcement that it would cut 5,000 jobs, about 5 percent of its workforce, over the next 18 months owing to fallout from the global recession. The company also reported that its profit in the second quarter slid 11 percent.

"We are not immune to the effects of the economy," Microsoft Chief Executive Steve Ballmer said in the company's earnings report.

Intel Corp. said Wednesday that it plans to cut up to 6,000 manufacturing jobs as the company struggles with lower demand for personal computers.

Even More Stimulus Needed?

Shepherdson of High Frequency Economics believes that the bleak economic situation isn't likely to change until the planned federal package is enacted and filters broadly throughout the economy. He predicts the administration will have to seek an additional stimulus package as early as next year as the economy worsens in coming months.

A report from the Congressional Budget Office concluded that much of the stimulus money would not be spent until after 2010. The report found that of the $355 billion Democrats proposed for infrastructure and other so-called discretionary spending, only $136 billion would be spent in the next two years.

"The economy is in an unambiguous trend downward. It is going to require a great deal of effort before that begins to change," Shepherdson said.

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