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Tech layoffs signal slowing economy but not yet a recession

Higher interest rates, which are already weighing on the broader economy, are also forcing tech companies to cut back on workers

Twitter headquarters in San Francisco on Oct. 28. (Nic Coury/Bloomberg News)

Tech company layoffs are not expected to prompt a tsunami of job losses in other industries, but they are another sign of a cooling economy more broadly, economists say.

Facebook parent Meta announced that more than 11,000 employees would be laid off. Twitter is slashing about half of its workforce, or some 7,500 jobs. Amazon CEO Andy Jassy confirmed in a note to employees Thursday that the company had shed staff in its devices business this week and will continue to downsize into 2023. It’s expected to eliminate roughly 10,000 jobs.

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While the layoffs could trickle down into some other industries, economists say the higher-profile tech job losses have been triggered by unusual events — such as Elon Musk’s purchase of Twitter and overzealous pandemic hiring — that aren’t a harbinger of catastrophic layoffs in other sectors.

“There’s always some spillover,” said Jason Furman, an economics professor at Harvard University who served as an economic adviser during the Obama administration. “If people lose their jobs, they spend less money in the area they live. But I think the sort of direct knock-on effect is much smaller than your traditional mass layoffs in, say, manufacturing.”

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Other economists agree. Goldman Sachs chief economist Jan Hatzius wrote in a note to clients this week that “tech layoffs are not a sign of an impending recession,” adding that the unemployment rate would rise by less than 0.3 percent even if most of the tech industry lost jobs at once. And Nela Richardson, chief economist at the payroll processing firm ADP, said the layoffs at Twitter and Meta are “pretty unique corporate events that are not necessarily tied to the broader labor market.”

The labor market has fueled a robust recovery from the pandemic, even as the economy has lately shown signs of slowing down. Employers added 261,000 jobs in October, beating economists’ predictions. With nearly two job openings for each unemployed person, emboldened workers across industries have demanded higher wages and better conditions from employers facing chronic labor shortages.

Additionally, the tech layoffs have yet to make a notable mark on the weekly claims for unemployment insurance. Claims for jobless benefits last week edged down by about 4,000, compared with the previous week, according to the Labor Department.

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As the Federal Reserve has increased interest rates to cool off the economy, signs of strength remain. In October, consumers boosted retail sales by 1.3 percent from the previous month. Also, inflation measured by the consumer price index and the producer price index both showed signs of easing in October, though they are still at longtime highs.

But there are plenty of signs that interest rates are cooling the broader economy, both inside and outside of tech. FedEx’s freight unit announced voluntary furloughs on Monday in response to slowing demand. Disney Plus, the entertainment giant’s streaming service, announced layoffs and hiring freezes last week. Advertising and media companies as well as big law firms have also slashed jobs.

That follows slowdowns in other interest-rate-sensitive sectors, such as real estate, finance and construction, as mortgage rates reach the highest level in 20 years, dissuading home buyers.

“I do think tech layoffs are a function of [higher interest rates] that are going to slow job growth throughout the economy,” Furman said.

While experts generally agree that a recession is unlikely to be as severe as the Great Recession of 2007 to 2009 or the pandemic-fueled collapse in 2020, there is a growing consensus that the economy will face a mild recession in the next year.

But tech layoffs could hurt industries that are dependent on tech and its workers for revenue. Local economies, such as San Francisco and Seattle, could feel the pinch, though many tech workers left these metro areas during the pandemic and have not returned. Some small-business owners in San Jose have already expressed fears about impending financial hardship.

“There are a number of vulnerable local economies — Seattle, the Bay Area, Austin, Denver,” said Aaron Terrazas, the chief economist at Glassdoor. “In those communities, tech has been over-hiring. Those will feel the chill.”

Tech companies typically rely on a variety of contracted security guards, shuttle bus drivers, janitors and cafeteria workers — roles that also could see job cuts. Union officials at Unite Here Local 2, which represents hospitality workers in Silicon Valley, said that Facebook has not yet laid off cafeteria workers but that the company started freezing positions about a month ago.

“The occupation worst affected during covid was low-wage service jobs in high-wage areas,” said Julia Pollak, the chief economist at ZipRecruiter. “We’re likely to see a similar thing play out. Those highly paid tech workers who spend $20 a day [on] a lunch will be pulling back.”

As tech companies make sweeping cuts to their spending, other local contractors and services could see cutbacks.

“Companies reduce ad spending, and that ripples to media companies and back to other tech companies that rely on advertising,” Pollack said. “During covid, every tech company was canceling stock photo subscriptions. The whole range of services and subscriptions that tech companies rely on got squeezed, but that wouldn’t be nearly as large this time around. A nuclear bomb hasn’t gone off.”

Several economists noted that layoffs at Meta, Twitter and Amazon could be relatively self-contained events, related more to their own corporate restructurings than the overall economic outlook.

Twitter’s layoffs were in large part a response to Elon Musk’s $44 billion leveraged buyout of Twitter, which loaded about $13 billion of debt onto the social media giant. The layoffs at Meta arrive as the company has struggled to develop a new product, the virtual world of the “metaverse,” while facing a decline in ad revenue and competition from other social media platforms, such as TikTok. Amazon, which hired aggressively during the pandemic, has also seen a dent in sales this year as consumers have shifted some of their spending habits back to in-person shopping.

The companies have reported that the layoffs are largely concentrated in human resources, recruiting and advertising — areas that typically expand during periods of growth. At Twitter, however, the cuts were widespread.

Justin Wolfers, an economist at the University of Michigan, said the layoffs at Amazon, Meta and Twitter are a blip on the overall labor market. Wolfers noted that the latest data shows that about 5.7 million U.S. workers left or lost their jobs in the past month; meanwhile, the past two weeks have seen roughly 20,000 layoffs in tech.

“That amounts to about one-third of 1 percent of the total separations in a month,” Wolfers said. “Large numbers of separations are actually the norm in the U.S. economy. I think that there is a tendency for the human brain to look for order, even when there’s chaos.”

The information services sector, which includes tech, makes up about 2 percent of the U.S. workforce, said Richardson, the ADP economist.

Still, these layoffs arrive as tech industry investors have become less willing to take on financial risk as the cost of lending has risen, marking the end of a booming era for the industry. Over the past decade, low interest rates had allowed venture capitalists to pour cash into start-ups.

And so far this year, tech has weathered the largest number of layoffs going back to the Great Recession. The industry has already cut 100,000 jobs, after a period of frenzied hiring up until earlier this year, with tech companies fiercely competing — with extravagant bonuses and seven-figure salaries — for a limited supply of talent. The reversal of fortune for tech workers happened quickly.

“Here, you have a trimming of some major, very solid companies that brings them back to [a position that is] even bigger still than they were two years ago,” Furman said. “In the dot-com era, there was just huge amounts of overspending and companies disappeared. This doesn’t feel anything like that.”

Some economists have taken a more optimistic outlook, noting that industries in dire need of technical innovation — such as government, retail, manufacturing, health care and education — could benefit from the new availability of engineers and data scientists looking for work. In the past, they could not compete with the salaries and packages offered by tech companies.

“I’m going to take the contrarian view and say that I think this will be good for the rest of the economy,” said Erik Brynjolfsson, an economist at Stanford University. “I think the salaries in tech were unrealistic. Now there’s a bunch of really good coders and engineers for the rest of the economy where they are needed a lot more.”

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