The past few months have delivered a steady drumbeat of job cut announcements at some of America’s largest and wealthiest companies.
Just this week Amazon said it was cutting 18,000 workers, or 6% of its office staff, while enterprise software company Salesforce said it would reduce its workforce by 10%, or about 8,000 employees.
This was followed by announcements from dozens of other companies, including big names like Meta, owner of Facebook, WhatsApp and Instagram, hardware heavyweight Cisco and payments company Stripe.
Despite the belt buckles in Silicon Valley, the world’s largest economy carries on.
Employers in the United States added 223,000 jobs in December, according to the latest official figures. While this was slower than gains in 2021 when activity revived post-pandemic, it was still strong by most measures.
The unemployment rate fell to 3.5%, once again reaching historic lows.
The economy is widely forecast to slow in the coming months as rising prices weigh on consumer spending. Businesses are also struggling with higher borrowing costs after the US Federal Reserve rapidly hiked interest rates last year.
So are the cuts in tech a red flag to others?
“I don’t think people should worry,” said Julia Pollak, chief economist at job portal ZipRecruiter. “What we’re seeing now appears to be … a correction, not the start of an ominous, systematic recession.”
Many tech execs who made the announcements have blamed overstaffing during the pandemic as more activity shifted online and business boomed.
Funding for smaller startups has also dried up in 2022 due to higher interest rates and the sharp drop in the US stock market. Even major setbacks that some companies suffered from the meltdown in the crypto sector did not help sentiment.
Joe Brusuelas, chief economist at consultancy RSM, said the wave of tech cuts is a “necessary and expected” adjustment after a generation of rapid growth fueled in part by low interest rates and culminating in the pandemic frenzy.
“An era of excess has come to an end,” he said.
“Firms and individuals should be prepared to reset expectations for growth, jobs and investment in what remains a very solid industry.”
He suggested tech companies will no longer be isolated from ups and downs in the broader economy, including the expected downturns in Europe and the UK this year.
However, he added that the job losses should not be “overinterpreted”, noting that many of the affected workers, at least in the US, appear to be finding new jobs quickly.
The latest jobs report from the Labor Department showed that payrolls in the information sector – which includes much of the technology industry – fell by just 5,000 from November to December. This is despite the fact that thousands of job cuts have been announced in recent months and employment has increased compared to a year ago.
“It’s probably more of a canary in the coal mine for the world economy than for the American economy,” he added, noting that many of the cuts in technology have hit foreign personnel.
Last week, the head of the International Monetary Fund, Kristalina Georgieva, warned that a third of the world is likely to be in recession by 2023. That will hurt tech companies, many of which do big business abroad.
But for now, the US jobs market has remained more resilient than expected, giving some hope that the country will be able to weather a harsh downturn, despite the central bank raising interest rates to try to cool the economy and prices rising.
Nearly every sector of the US economy added jobs over the past month, with bars and restaurants, healthcare companies and construction companies helping to propel gains.
Although job losses are mounting — particularly in sectors vulnerable to higher interest rates, such as real estate, banking and technology — numbers have remained close to historic lows overall over the past year, said Andrew Challenger, senior vice president at Challenger, Gray & Christmas has pursued such announcements since the 1990s.
“We see that the job market is cooling off,” he says. “It’s a slowdown but I don’t think I can tell at this point if it’s a panic situation or not.”
Jeffrey Pfeffer, a professor in Stanford University’s Graduate School of Business, said he worries many of the layoff announcements are due to peer pressure, as executives feel compelled to copy other firms that are making cuts — even if they remain healthy Generate profits.
If this sentiment spreads as expected, there is a risk that predictions of economic hardship will materialize.
“Companies do what other companies do,” he said. “This is going to become a self-fulfilling prophecy because if everyone lays someone off, the unemployment rate will go up and we’re actually going to have a worse economy.”
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