Are Job Cuts Indicating a Recession?

Introduction

The US economy has contracted for the second straight quarter from April to June, hitting a widely accepted rule of thumb for a recession, as the Bureau of Economic Analysis reported. The tech industry has already been roiled for several months due to layoffs, hiring freezes, and recalled job offers. But now, companies from all sectors and even those who aggressively hired employees during the pandemic are on the verge of hiring freezes due to macroeconomic uncertainty hovering around the world. Companies like Amazon, Shopify, and Peloton were some big names that almost doubled their workforces to manage smoothly through the pandemic surge and meet customer demand. 

But now, even they are scrambling to reverse course!

Exhibit 1: Quarterly Change in U.S. GDP. Source: CNBC

Are Job Cuts Lagging or Leading Economic Indicators?

Economists, analysts, policymakers, investors, and even the government institutional bodies measure the economy’s health by examining regularly released data sets called economic indicators, broadly classified under Leading and Lagging indicators. These indicators also help enterprise leaders, CEOs, and top-level company executives understand business conditions and predict economic trends. 

Leading indicators such as manufacturing activity, retail sales, building permits, the housing market, stock market, etc., make predictions about what might happen and also attempts to forecast the coming stage of the business cycle. Since leading indicators have the potential to forecast a future event related to the economy, therefore fiscal policymakers and governments make use of such data sets. They do so to implement or strategically alter policies and programs to ward off the occurrence of any unlikely economic event.

Exhibit 2: Lagging & Leading Indicators. Source: bmc blogs

On the other hand, Lagging indicators are data sets that follow an economic event and only shift after the economy changes. Unlike leading indicators, they do not tell us where the economy is headed but indicate how it changes over time and helps identify long-term trends. The data relating to changes in GDP, income & wages, unemployment, inflation, interest rates, etc., comes under the lagging indicators, and the best way to use them is in conjunction with leading indicators, as mentioned earlier. Therefore, job cuts are the lagging indicators!

The Confusing Job Market

The pandemic created a unique, once-in-a-lifetime opportunity in many different industries leading to a dramatic reallocation of capital. Fast forward to today, the companies under tech and finance are bracing for the worst, the retail sector is facing mixed demand, and tourism can’t hire fast enough! 

As mentioned earlier, Amazon hired like crazy in 2020 and 2021 to meet customer demand and to beef up its warehouse capabilities. Although, by the end of the second quarter of this fiscal year, it has reduced its headcount by 99,000 people (to 1.52 million employees). During the pandemic, many businesses & SMEs were forced to go digital, leading to a hiring boom by companies like Shopify (whose cloud technology helps retailers build and manage online stores). Such companies were one of the biggest beneficiaries of the pandemic-driven-e-commerce boom, but with stores reopening post-COVID-19 lockdowns, the consumers shifted to pre-pandemic shopping habits. This shift in consumer buying behavior led to a reduction of 1,000 Shopify workers, i.e., roughly around 10% of its global workforce.

Exhibit 3: Expansion of Workforce and Job Cuts. Source: CNBC

The above figure shows how tech companies almost doubled their workforce in the last two years to meet the pent-up consumer demand during the pandemic. However, the picture in 2022 seems to be quite gloomy and doomy, with major job cuts anticipated across the board. 

Morgan Stanley, Goldman Sachs, Citigroup, JP Morgan, and other top banks in the U.S. added a combined 59,757 employees from the start of 2020 through the middle of 2022. They reportedly hired more employees than required to handle a record level of IPOs and M&A deals, and mortgage lenders added headcount as rock-bottom rates led to a refinancing boom. But the party on Wall Street didn’t last long as stock markets worldwide plummeted and IPOs dried up, resulting in a sharp revenue decline in the second quarter. Therefore, banks are responding to such a decline in revenue by slowing hiring or making job cuts across several roles. As employees typically make up the single biggest line item regarding banking expenses, job cuts and layoffs are pretty much on the horizon.

Conversely, travel, tourism, and hospitality companies like Delta Airlines and Hilton Worldwide are experiencing difficulty hiring sufficient employees to meet the renewed demand for leisure activities. These were some of the sectors which saw major downsizing when the pandemic first hit. However, it is now rebounding from the pandemic lows, but companies are struggling to repopulate their employees fast enough to meet the increased demand. It indicates a confusing job market as different segments and industries give out mixed signals, with some industries bracing for the worst while others struggle to recoup workers.

Job Cuts & The State of the Economy

CEOs have found a way to signal that they’re strong, decisive leaders, taking bold actions by hiring and firing employees; even though such decisions might fly in the face of what might be best for the company and the broader economy. This kind of leadership still prevails even after companies abandon shareholder capitalism and focus their approach on Stakeholder Capitalism. It is an approach that takes everyone together and vows to do business by keeping in mind the welfare of all the stakeholders rather than merely focusing on generating profits.

When giants like Amazon, Tesla, and Netflix slow down their hiring spree or lay off a significant percentage of their global workforce, it could build a hypothesis regarding the state of the economy in the medium-to-long term. These layoffs are helping contribute to flailing consumer sentiment about the economy, which could contribute to a recession. With such a gloomy picture around the corner, households may cut back on spending in anticipation of any economic mishap, and the laid-off employees may behave more cautiously till they find a new job. 

Insightful Results From Research Studies

Additionally, even the research shows that those who stayed back or were not laid off will start looking for other jobs as they feel uneasy about their employer’s prospects. According to the news site Electrek, Tesla has laid off thousands of employees as the CEO Elon Musk had a “super-bad feeling” about the economy, which prompted him to lay off workers. From the below infographic, we can see that the laid-off Tesla employees went to its competitors like Rivian, Apple, and Amazon to help them innovate. 

Exhibit 4: Tracking Tesla Talent. Source: Electrek

According to a study by researchers at the University of Wisconsin-Madison and the University of South Carolina, it was found that downsizing a workforce by 1% results in a 31% increase in voluntary turnover next year. Also, the low morale weakens the engagement and unique relationships with customers or suppliers. A 2002 study by Stockholm University and the University of Canterbury found that laid-off employees experienced a 41% decline in job satisfaction, a 36% decline in organizational commitment, and a 20% decline in job performance. 

What are your thoughts on job cuts? Does it indicate a recession or just a cost-cutting measure by organizations?

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