Be open and honest if their roles are in jeopardy. Understand their concerns and answer their questions as best you can. If you do not know, say so. Keep them busy, and involved in important work.
If possible (ie: no lying!), do the following: Tell your best performers, in confidence, that you'll shield them as much as possible providing they continue to produce. Suggest to, or tell, the underperformers that their job may be in jeopardy due to the economy / market / their performance / etc. - they may be able to bail out before the hammer drops. For the entire team, I concur with "Interview Candidates" answer above.
Stay positive, and focus on the work at hand. Keeping busy on important work helps people realize what they are doing is important. An ideal mind is the devil's.... well, you know the old saying. Be sure the physical environment is welcoming. In summer, raise the blinds, clean the common areas of papers and clutter. You will be amazed how much better things look when you take 10 short minutes a day to make the physical environment look better. The sun is out, blue skies, and maybe it's not so bad here. Let people vent. If you are not holding 1-on-1 meetings, then start. Hear people out. Be honest about what you can talk about. Don't sugar coat anything, but give those more junior to you some context and a bigger view. Sure some people will be laid off, but most will remain. Opportunity to do different things will become available. Sure you will work harder, but you will learn, growth, and build your reputation for having a level head in complex times. Lastly, have a plan. Know what you will do as a manager if you have to layoff 1,2 or 3 people. Know how the work will move around. This will allow you act quickly and decisively should things come to that. Having a manager who looks in charge because they already thought it through will go a long way.
