Tech sector layoffs warning sign of broader job losses
Zachary Halaschak
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Tech companies are beginning to lay off workers, a warning sign for broader layoffs across economic sectors over the next year.
While most industries experienced a robust labor market in 2022, the technology sector has begun to be pinched by disappointing stock performances and fears that the economy will tumble into a recession in the coming months. Meanwhile, the overall labor market remains remarkably resilient, which most economists don’t predict will last amid the Federal Reserve’s past and future interest rate hikes.
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In the United States, more than 90,000 workers in the tech sector were laid off in 2022, according to tracking by Crunchbase News. For instance, Tesla reportedly implemented a hiring freeze last month and will be conducting a round of layoffs next quarter. Ride-sharing giant Lyft in November revealed to staff that it would be cutting some 700 jobs in an effort to bolster its business, which is facing a slowing economy, heading into 2023.
Payment company Stripe announced that it would lay off more than 1,000 employees, which is about 14% of its labor force. Amazon announced it was laying off over 10,000 employees from its corporate offices and that it would implement a hiring freeze. Meanwhile, Meta announced last year it would slash more than 11,000 jobs in the company’s largest round of cuts in its nearly two-decade history.
Just this past week, Salesforce announced that it would gut a tenth of its entire workforce as the economy continues to sour. CEO Marc Benioff wrote in a message to employees that too many were hired during the pandemic and the economic environment is now “challenging.”
“As our revenue accelerated through the pandemic, we hired too many people leading into this economic downturn we’re now facing, and I take responsibility for that,” he told workers.
While the losses have largely been contained to the tech sector, economists say that news of fresh layoffs from other industries is expected. That is because of the Fed’s historic rate hikes, which began early last year and will likely continue into 2023.
At one point, the Fed hiked interest rates by 75 basis points four times in a row — a level that is akin to a dozen conventional rate hikes in a mere matter of months. The central bank’s rate target is now 4.25% to 4.50%, the highest it has been since before the financial crisis in 2008. A survey of Fed participants released after the meeting shows that most foresee the target rate rising from 5% to 5.25% in 2023, which implies another 75 basis points of hikes.
Rate hiking is the main tool the Fed has to contain inflation, although it is also a blunt tool that causes the economy to slow down. And if the economy slows down too much, a recession may occur.
Mark Hamrick, Bankrate’s senior economic analyst, pointed out that ultra-low interest rates during much of the pandemic caused the technology sector to expand. And now, as economic headwinds grow, companies are having to downsize. The Fed slashed rates to near-zero in 2020 and kept them at that level for nearly two years.
“In that situation, money tends to flow very easily, and tech was a target for a lot of money, including for some firms that either weren’t profitable or showed no prospect of profitability,” he told the Washington Examiner. “The cycle is in a different phase now, and the economy is in what would appear to be in a slowing phase.”
Thomas Smythe, a finance professor at Florida Gulf Coast University, told the Washington Examiner that the phenomenon of tech layoffs heading into a possible recession is unusual because, typically, job losses start in the blue-collar industries. He also noted that executives of other white-collar jobs, including those on Wall Street and in the banking industry, are starting to make announcements about scaling back.
A broad swath of industries, though, not just tech, will be affected by unemployment should there be a recession. The earliest job losses will be in the most interest-rate-sensitive areas of the economy — for example, most experts contend that the housing market is already in the throes of a recession.
The average rate on a 30-year-fixed-rate mortgage has soared from nearly 3% at the start of the year to about 7% a few weeks back, putting home purchases out of reach for many would-be borrowers.
Sales of existing homes have fallen for 10 straight months and are at the lowest level since early in the pandemic. In November, existing-home sales plunged by 7.7% to a seasonally adjusted annual rate of 4.09 million, according to a report by the National Association of Realtors released Friday. Sales were down more than 35% from a year ago.
The housing market’s decline portends a broader recession because its effects ripple out into all parts of the broader economic landscape.
For example, when new home construction slows, construction workers might be laid off or work fewer hours, resulting in less income and less money to spend on things such as dining out or going on vacation. When less money is spent in other parts of the economy, businesses in those industries will lose revenue and might have to cut back by laying off workers — thus the ripple effect.
Despite most economists predicting an economic downturn with notable job loss, the majority don’t believe it will be as bad as recessions past. The unemployment rate in October 2009 amid the Great Recession was 10%, and during the start of the pandemic-related lockdowns, it rose to a whopping 14.7%.
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Hamrick says there is cause for some optimism. He said that if the U.S. can get through the next couple of years without a severe recession, then that would suggest that the country could also avoid the type of mass job loss seen in 2009 and 2020.
“The worst-case scenario would be high single-digit or low double-digit unemployment rates, and I just don’t think that the conditions as we know them right now mirror either the previous two experiences,” he said.