Layoffs...What Are They Telling Us?
February 11, 2023
On February 7, 2023, the Wall Street Journal published an article titled "The Companies Conducting Layoffs in 2023: Here’s the List” with the subtitle “Alphabet, Microsoft, Goldman Sachs, 3M and Salesforce are cutting positions amid recession fears”.
Fast forward to February 10, 2023, and the Wall Street Journal published an article titled "Mass Layoffs or Hiring Boom? What’s Actually Happening in the Jobs Market” with the subtitle “Restaurants, hotels and hospitals are finally staffing up, more than making up for losses in tech and other sectors”.
As the February 7th article title would suggest, it provides a list of companies announcing layoffs in 2023. The media has largely characterized layoffs of late as being predominantly isolated to the tech industry, while tech layoffs have garnered most of the attention, the article highlights that layoffs have spread to many other industries as well.
The February 10th article effectively says “Yes, there have been layoffs, but hirings are making up for those layoffs.”
Both articles provide great insight into the current jobs market, but our goal is to look beyond the articles and try to sense what this is telling us about the economy as a whole and where it may be heading.
Here is a sampling of some of the layoffs and commentary presented in the February 7th article broken down by industry sector:
Technology
“Alphabet plans to eliminate roughly 12,000 jobs, reducing staff by 6% and marking the company’s largest-ever round of layoffs as it copes with a darkened economic outlook.”
“Amazon.com Inc. is laying off more than 18,000 employees concentrated in corporate ranks.”
“Dell Technologies Inc. said it is cutting about 5% of its workforce as interest rates rise and financial conditions tighten.”
“Microsoft said it was laying off 10,000 employees…We’re also seeing organizations in every industry and geography exercise caution as some parts of the world are in a recession and other parts are anticipating one.”
“Spotify Technology SA plans to cut its workforce by about 6%...Over the last few months we’ve made a considerable effort to rein-in costs, but it simply hasn’t been enough.”
“Zoom Video Communications Inc. is laying off 15% of its staff.”
Financial Services
“Blackrock Inc., the world’s largest asset manager is laying off around 3% of its workforce.”
“Bank of New York Mellon Corp. plans to cut about 3% of its workforce this year.”
“Goldman Sachs Group Inc. plans to cut 3,200 jobs.”
“PayPal Holdings Inc. will layoff 2,000 employees, or 7% of its workforce.”
Retail and Services
“FedEx Corp. is laying off more than 10% of its global management staffers and consolidating some of its teams and functions amid a shipping slowdown.”
“Bed Bath & Beyond Inc. is planning more cost cuts, including an unspecified number of job reductions, as its cash pile and sales continue to dwindle.”
“Carvana Co. is cutting additional employees after laying off 4,000 people last year.”
“Hasbro Inc. said it would eliminate 15% of its global workforce.”
Crypto
“Coinbase Global Inc. said would eliminate around 20% of its staff and enact broad cost cuts, the latest sign of pain in the cryptocurrency industry.”
“Crypto.com is cutting 20% of its global workforce in a second round of layoffs in six months.”
“Crypto lender Genesis Global Trading Inc. laid off 30% of its staff and then filed for bankruptcy protection.
Autos and Manufacturing
“Boeing Co. said it would cut about 2,000 jobs.”
“Dow Inc. said it is laying off about 2,000 employees globally.”
“Rivian Automotive Inc. plans to initiate another round of layoffs.”
“3M Co. said it is cutting 2,500 manufacturing jobs globally as the company confronts turbulence in overseas markets and weakening consumer demand.”
Subsequent to the above article, the Wall Street Journal published an article titled "Disney Plans to Cut 7,000 Jobs, $5.5 Billion in Costs” on February 9, 2023.
As noted above, this is not a comprehensive list of company layoffs mentioned in the article, rather just a sampling. Also, these are the layoffs mentioned as having occurred (or announced) since the beginning of 2023 which we know was not the beginning of widespread announced layoffs.
The following graphics were created by Visual Capitalist and show that layoffs did not just begin in 2023, instead, we saw many companies across multiple industries initiating layoffs over the course of 2022.
It is worth noting some of the commentary from the company’s announcing layoffs. Over and over again you hear commentary along the lines of: “darkened economic outlook”, “fears of recession”, “weakening consumer demand”, “attempting to rein-in costs”, etc.
Each quarter the Federal Open Market Committee (FOMC) releases its “Summary of Economic Projections”. Their most recent release was December 14, 2022, and I have provided the summary table below.
The most recent unemployment rate was released February 3, 2023, which indicated that the unemployment rate for January 2023 fell to 3.4% from 3.5% in December 2022.
With that said, I’d like to draw your attention to the boxes I have highlighted in the above table. These boxes detail the FOMC’s forecasts for the unemployment rate. The top row of the highlighted boxes represents the FOMC’s most recent forecast in December. The bottom row represents the FOMC’s previous forecast in September.
Note that across the board, the FOMC increased their unemployment rate forecasts from September to December and that all forecasts (both September and December) are higher than the most recent unemployment rate of 3.4% for January 2023.
Why is this important? It is important because of the following chart. This chart shows that since the 1950’s, every time the unemployment rate had a sustained increase above its 12-month moving average, a recession has occurred.
As noted above, the current unemployment rate is 3.4% and the current 12-month moving average is 3.59%. If the FOMC is even directionally correct in their assessment of where the unemployment rate is heading in 2023, and subsequent years, the unemployment rate will easily cross above its 12-month moving average and will likely be sustained there for a period of time.
I believe the FOMC is acutely aware of this dataset and the historical outcomes. Therefore, I believe the FOMC is signaling that they plan to leave rates sufficiently restrictive so as to incite a recession in the US economy.
Further, as I shared in my previous post “Reading the FOMC Tea Leaves”, I believe the FOMC is deathly afraid of having a repeat of what happened in the 1970’s. Recall, in the early 70’s, when the US was experiencing a similar bout of inflation, in response, the FOMC raised rates and thought they had inflation under control. This led the FOMC to believe it was safe to begin to reduce rates. Unfortunately, upon doing so, inflation came roaring back which led to a dramatic increase in rates during the late 70’s and early 80’s and back-to-back recessions shortly thereafter. I think the FOMC wants to make sure it does not see a repeat of this scenario and hence why they are “okay” with forcing the US economy into a recession as they believe (my words) that a recession is the only way to “cure” the inflationary problem.
As I noted above, I do think there is a lot of truth to the February 10th article (i.e. hirings offsetting layoffs); however, I think we have to take a step back and ask ourselves an honest question which is: “All else being equal, would you typically associate a robust and improving economy with the amount of layoffs we’re currently seeing and the commentary companies are providing around those layoffs?” I don’t think we would.
It is difficult, if not impossible, to predict the exact timing of a recession and maybe even more importantly, how and when the markets will respond to it. With that said, if it is reasonable to believe that we are at least directionally headed towards a recession, it would seem important to remember what I noted in my previous post so that you can act now to protect against this possibility:
“If we look at history, we find that since the 1960’s, the S&P 500 has always made a new low once a recession began and the average decline from the start of a recession to the market trough is -29.2%. Further, if we look at this same time period, we find that the average decline from the first FOMC rate cut to the market trough is -27.7%.”
Lastly, investors often get caught up in acting as though a recession means the world is coming to an end (figuratively speaking), but recessions should be looked at as a natural part of the cleansing process that allows markets to reset and move directionally more towards fair value. Further, a recession often presents a generational buying opportunity for risk assets. The key though is having the capital available to do so when the time comes.
Until next time.