Are tech job cuts a warning for the wider economy?

January 8 (BBC) – In recent months some of America’s biggest and richest companies have announced job cuts.

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

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That followed announcements from dozens of other firms including big names such as Meta, 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.

US employers added 223,000 jobs in December, according to the latest official figures. While that was slower than the gains seen in 2021, when activity picked up again after the pandemic, it was still strong by most standards.

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

A warning sign?

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

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

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

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

Funding for smaller startups has also dried up due to higher interest rates and the downturn in the US stock market in 2022. The big successes that some businesses have taken out of the crisis in the crypto sector have not helped the mood either.

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

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

“Businesses and individuals should be prepared to reset prospects for growth, employment and investment across industries that remain very strong.”

He suggested that technology 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 said job losses should not be “overinterpreted,” noting that many of the affected workers, at least in the United States, appear to be quickly finding new jobs .

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The latest jobs report from the Department of Labor showed that payrolls in the information sector – including much of the technology industry – fell by 5,000 from November to December. That’s despite the fact that thousands of job cuts have been announced in recent months and compared to a year ago, employment has risen.

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

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

But for now, the US labor market has remained unexpectedly resilient, giving some hope that the country will be able to weather the tough downturn, despite the central bank raising interest rates to try to cool the economy and price increases.

Almost every sector of the US economy added jobs last month, with bars and restaurants, healthcare firms and construction firms helping to drive the gains.

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While job losses are on the rise – particularly in sectors vulnerable to higher interest rates such as housing, banking and technology – the overall figures remained close to historic levels last year, said Andrew Challenger, vice president senior at Challenger, Gray & Christmas, who was following such. ads from the 1990s.

“The labor market is cooling,” he says. “It’s a slowdown but I don’t think I could say at this stage if it’s a panic situation or not.”

Jeffrey Pfeffer, a professor at Stanford University’s Graduate School of Business, said he worries that many of the layoff announcements reflect peer pressure, as executives feel compelled to copy other companies that make cuts — even as they continue to grow. making healthy profits.

If that sentiment spreads, as expected, there is a risk that forecasts of economic hardship will come true.

“Companies do what other companies do,” he said. “This becomes a self-fulfilling prophecy because if everyone lays someone off, the unemployment rate will go up and we’ll actually have a worse economy.”

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