Are tech job cuts a warning for the wider economy?

Are tech job cuts a warning for the wider economy?

Recent months have delivered a steady drumbeat of announcements of job cuts at some of America’s biggest and richest companies.

Just this week, Amazon said it was axing 18,000 workers, or 6% of its office staff, while business software firm Salesforce said it would reduce its workforce by 10%, or roughly 8,000 people.

That followed announcements from dozens of other firms including big names such as Meta, the owner of Facebook, WhatsApp and Instagram, hardware heavyweight Cisco, and payments firm Stripe.

Despite the belt-tightening seen in Silicon Valley, the world’s largest economy soldiers on.

Employers in the United States added 223,000 jobs in December, according to the latest official figures. Although that was slower than gains seen in 2021, when activity roared back to life after the pandemic, it was still strong by most standards.

The unemployment rate fell to 3.5%, returning to historic lows.

Warning sign?

The economy is widely predicted to slow in the coming months as rising prices weigh on consumer spending. Firms are also grappling with higher borrowing costs after the US central bank hiked rates rapidly last year.

So are the cuts in the tech industry a warning sign for others?

“I don’t think people should be worried,” said Julia Pollak, chief economist at the job site ZipRecruiter. “What we’re seeing right now seems to be… a correction, not the start of an ominous, systematic recession.”

Many tech executives making the announcements have blamed over-hiring during the pandemic, when more activity moved online and business boomed.

Funding for smaller start-ups has also dried up due to higher interest rates and the sharp downturn in the US stock market in 2022. Big hits some firms have taken from the meltdown in the crypto sector have not helped the mood either.

Joe Brusuelas, chief economist at consultancy RSM, said the wave of tech cuts represented a “necessary and expected” adjustment after a generation of rapid growth, fuelled in part by low interest rates, which culminated in the pandemic frenzy.

“An era of excess has come to an end,” he said.

“Firms and individuals should be prepared to reset expectations about growth, employment and investment across what continues to be a very solid industry.”

He suggested that tech firms will no longer be insulated from ups and downs in the wider economy, including the expected downturns in Europe and the UK this year.

But he added that the job losses should not be “over-interpreted”, noting that many of the workers affected, 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 tech industry – shrank by just 5,000 from November to December. That’s despite thousands of job cuts being announced in recent months and compared to a year ago, employment is up.

“It’s probably a canary in the coal mine for the global economy more than it is for the American economy,” he added, noting that many of the tech cuts have hit foreign staff.

Last week, International Monetary Fund chief Kristalina Georgieva warned that a third of the world would likely be in recession in 2023. That will hurt tech firms, many of which do big business overseas.

But for now, the US labour market has remained unexpectedly resilient, making some hopeful that the country will be able to fend off a harsh downturn, despite the central bank raising interest rates to try to cool the economy and price rises.

Nearly every sector in the US economy added jobs last month, with bars and restaurants, health care firms and construction businesses helping to drive the gains.

Although job losses are rising – especially in sectors vulnerable to higher interest rates like housing, banking and tech – the figures overall remained near historic lows last year, said Andrew Challenger, senior vice president at Challenger, Gray & Christmas, which has been tracking such announcements since the 1990s.

“We are seeing the labour market cooling,” he says. “It’s a slowdown but I don’t think I could say at this point whether or not it’s a panic situation.”

Jeffrey Pfeffer, professor at Stanford University’s Graduate School of Business, said he worries many of the layoff announcements reflect peer pressure, as executives feel compelled to copy other firms making cuts – even as they continue to churn out healthy profits.

If that sentiment spreads, as he expects, it risks turning the forecasts of economic hardship into reality.

“Companies do what other companies do,” he said. “This becomes a self-fulfilling prophecy because if everybody lays somebody off, the unemployment rate will go up and we will in fact have a worse economy.”