Friday, January 23, 2009; D01

Microsoft announced its first major layoffs in company history, saying it would cut about 5,000 jobs, one of several economic signals that emerged yesterday indicating that the recession was spreading and deepening.

A subdivision where construction has stopped in Miami. New-home construction fell to an all-time low in December of 2008. (By Joe Raedle -- Getty Images)

A stalwart of the technology sector, Microsoft was strong enough to weather the dot-com bust and the 2001 recession unscathed, but the severity of this decline has led to cutbacks. And two new government reports underscored that this downturn may be far worse than many workers have known.

The number of new housing starts has dropped to its low since the Commerce Department began keeping data in 1959.

The initial claims for jobless benefits, meanwhile, jumped 62,000, to 589,000, for the week ended Jan. 17, matching the highest level since the recession of the early '80s. Unemployment stands at 7.2 percent, but many economists expect it to continue to rise by at least another point.

At the same time, analysts and economists are predicting more staggering bank losses of $1 trillion or more, a prospect that could overwhelm the federal $700 billion financial rescue plan known as the Troubled Asset Relief Program, or TARP.

"We entered an economic free-fall in the fourth quarter of last year, and in the first three weeks of January, we have not seen any evidence of that stopping," said Robert Dye, senior economist at PNC Financial Services Group. "The economic landscape could hardly be bleaker. We're just seeing bad news piling on top of bad news right now."

The Microsoft layoff announcement followed a drumbeat of dismal news from many tech companies.

On Wednesday, another tech giant, Intel, announced cuts that would affect 5,000 to 6,000 jobs. It will also shutter its last manufacturing plant in Silicon Valley.

The effects of the downturn had set in fast for the world's largest chipmaker. In mid-October, Intel had forecast sales of $10.3 billion; 10 weeks later, they came in at $8.2 billion.

The "speed of the downturn" was surprising, a company spokesman said.

The trouble for technology companies is far-reaching: Motorola, Autodesk, Seagate Technology, Lenovo Group, eBay, Yahoo, Dell, Xerox, Nortel Networks and Sun Microsystems have all announced layoffs in recent months.

In explaining its job cuts, Microsoft cited the rapid slowing in sales of personal computers. The cuts represent about 5 percent of the company workforce, but Microsoft said it also expects to hire 2,000 to 3,000 people in the next 18 months.

"We are really putting the brakes on at a new level," chief executive Steve Ballmer said in an unusual appearance on a conference call with analysts.

In another break from previous practice, the company declined to predict its earnings for the rest of the year.

Even search engine juggernaut Google, which is weathering the recession better than most analysts had expected, announced yesterday that its profit had slipped for the first time since it went public in 2004.

In the fourth quarter, Google made $382 million, a 68 percent drop from the corresponding period in 2007.

Google chief executive Eric Schmidt described the upcoming months of the recession as "uncharted territory."

"We don't know how long this period will last," Schmidt said to analysts in a conference call.

"It is still going to be an ugly year for tech, even though it may be in better shape" than the last recession, said Bill Whyman, a tech industry analyst with International Strategy & Investment, a brokerage and investment advisory firm. "Its customers are in a world of pain, and it's hard for tech to do well when its customers are in such bad shape."

On the upside, the recession offers companies a reason for pruning staff it considers unproductive, said analysts, some of whom said the companies should trim more than announced.

The downturn "may actually be good for some of the firms in the industry which needed to rethink their model, clean out the deadwood . . . I would place Microsoft in that group," said Robert Enderle, president of the Enderle Group and a former senior research fellow with Forrester Research. "I expect tech to . . . lead out of the downturn. . . . But that process will be very painful."

While the recession was spreading further into the technology sector, it appears to be deepening in other areas of the economy, particularly home building.

Among builders and other businesses, uncertainty over when the downturn will end is ruining any appetite for new investments.

"Things have gotten so much worse in the economy over the last three to six months that for many people the light at the end of the tunnel isn't there anymore," said Stephen Stanley, chief U.S. economist with RBS Greenwich Capital.

Housing starts fell to a seasonally adjusted 550,000 units, 45 percent lower than a year earlier.

From December 2007 to December 2008, new-home construction fell in the Northeast by 38.6 percent, in the Midwest by 41.6 percent, in the West by 38.5 percent and in the South, which includes the Washington area, by 49.5 percent.

According to data from the National Association of Home Builders, building permits in the Washington metro area fell 38 percent between November 2007 and November 2008.

"This is the worst housing report that has ever come out," said Patrick Newport, an economist with Global Insight. "The only thing good about them is they're better than the numbers we're going to see next month."

The recession also is routing the labor market. Weekly unemployment claims were last higher than they are now in November 1982, during a recession in which the unemployment rate reached 10.8 percent.

"We are not expecting this one to get that bad," Dye said. "That one really set the standard for weakness."

Overhanging all predictions about the economy is what the government might do about it. Under consideration is an $825 billion economic stimulus bill, but some economists are calling for more direct support for banks.

A number of economists now think the volume of losses for banks could climb far higher than estimated.

New York University economist Nouriel Roubini, who has been credited with predicting much of the ongoing economic distress, on Tuesday estimated total losses at $3.6 trillion.

Even given the TARP, that "still leaves the U.S. banking system borderline insolvent if our loss estimates materialize," he and fellow economist Elisa Parisi-Capone said.

"There's no doubt that there's more losses to be taken," Stanley said. "It just becomes an issue of the willingness and ability of the government to subsidize the banking system."

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