Store job cuts could deepen through 2010

NEW YORK (CNNMoney.com) -- Retail layoffs could accelerate with a vengeance over the next year as the industry struggles with a newfound frugality among Americans, continuing weakness in the housing market and thousands of auto dealerships slated to close.

"Just as the manufacturing sector has been shedding jobs for many years even as jobs in other sectors have been added, we could see the same thing occur in the retail sector as the frugal future facing the U.S. consumer keeps consumption growth below trend," according to a report this week from Bank of America-Merrill Lynch.

Year-over-year, the industry, which is the third biggest employer after the government and the services sector, has already lost more than 600,000 jobs. And 11% of all jobs lost so far in this recession have been retail related, according to the Labor Department.

While the best case scenario is an estimated 150,000 more store jobs shed over the next year, the report said "the potential exists for up to 600,000 additional retail jobs to be at risk."

The firm arrived at this forecast by evaluating how sales per employee have been performing across major retail categories -- including auto and parts sellers, furniture, electronics, food and beverage, clothing and general merchandise stores.

Based on that formula, a decreasing sales per employee trend raises the likelihood of potential job cuts.

Consumption drop: Bank of America-Merrill Lynch economist Gary Bigg said in an interview that three factors will largely be responsible for the industry's shrinking labor force over the coming months.

"The sharp drop in consumption is why we think job losses will persist," said Bigg.

To his point, monthly store sales have declined for 10 of the last 13 months months as more households tighten their shopping budgets. Same-store sales measure sales at retail stores open at least a year.

Slumping sales have forced several major chains -- including Circuit City, Fortunoff and Linens' N Things -- out of business. Many other merchants are trimming their workforce to manage their expenses and stay in business through the economic downturn.

"Labor costs are a huge portions of retailers' operating costs," said Ellen Davis, vice president with the National Retail Federation, the leading retail trade group. "It doesn't make sense when sales are struggling to maintain a maintain a certain level of employment. So there is some correction happening."

"The housing market is still under pressure," said Bigg. Consequently, merchants that cater to home-related purchases such as furniture sellers, electronic stores and building materials suppliers "appear to have a large number of employees at risk of losing their jobs," he said.

Wait 'til '11: But Bigg expects that the majority of retail-related job cuts will occur in auto vehicles and parts dealerships that are closings as a result of General Motors and Chrysler bankruptcies.

Not surprisingly, the report showed that auto and parts sellers, furniture, electronics, clothing and building materials sellers have suffered declining sales per employees.

And only health and personal care stores, general merchandise and online sellers have seen a rising sales to employee ratio, which suggests that these sectors might be hiring in the coming months.

The real turning point will probably happen in 2011, Bigg said. "I think 2011 will be a good year for the economy. Consumer spending will increase about 1.5% in 2010 and 2% in 2011."

"The retail industry will restructure and survive just like the manufacturing industry went through tremendous restructuring in the 1980s and 1990s," he said.

"Retailers are hemorrhaging jobs right now," said Davis. "But I do think that when the economy rebounds, and sales bounce back, then retailers will need more people."

Still, retailers have to prepare for one harsh reality when the worst is behind them: "The days of shop til you drop are probably over," said Bigg.