Are We Staring Down a Recession, Or What?

As pandemic lockdowns eased, the economy heated up quickly. There was high demand for workers and products, but very low supply of both. This caused inflation to soar.

• As we emerged from the pandemic, the economy took off like a rocket. People had money to spend and energy to burn. Between the accumulation of savings and trillions in government stimulus, consumers were eager to purchase, upgrade, improve, invest, and explore. So, companies ramped up hiring.
• Except, neither talent pipelines nor supply chains could keep up with the demand. Companies increased salaries to compete for available talent—a move that was bolstered by crazy-low interest rates, which gave companies a lot more hiring power.
• But salaries weren’t the only thing to increase. Supply chains had dwindled during the pandemic and were unprepared to accommodate the uptick in demand for things like cars and smart phones, patio furniture and housing (including rent). Law of supply and demand meant prices for these goods also increased, though still-low interest rates took the sting out of these inflated sticker prices for consumers.
• Parallel to increases for goods, energy prices also skyrocketed to all-time highs. Higher energy costs result in higher production and transportation costs—and not just for smart phones and lawn furniture, but for groceries too...
• Which meant that the sustained and record-setting wage increases employees were getting wasn’t keeping pace with inflation. For example, for the year ending June 2022, a reported 5.1 percent increase in wages felt like a 3.6 percent loss.
• However, with an extremely tight labor market, companies were still paying high salaries to attract talent, the costs of which were offset to consumers by way of high prices (i.e., inflation).

The Federal Reserve’s interest rate hikes are an attempt to slow inflation by reducing the amount of money people are putting into the economy. The Federal Reserve, a body that sets economic policy in the US, was challenged with the task of reversing the course of inflation without crashing the economy. Their aggressive interest rate hikes were/are an attempt to achieve that goal by weakening a very strong labor market. That’s because as job opportunities shrink, the Fed expects competition for workers to ease and wage growth to slow, which means spending will slow, which means demand will slow, which means, hopefully, inflation will too.

• Except, unemployment, for now, remains low and job openings remain high.

Higher interest impact the labor market because they result in steeper borrowing costs for companies. Steeper borrowing costs mean less growth, less spending, and less hiring.

But what about the layoffs? Large technology companies that over hired during the early days of economic recovery, are feeling the squeeze of higher interest rates and a slowing economy in different ways (e.g., fewer sales, less advertising, steeper borrowing, etc.). Payroll cuts, or layoffs, are a quick cost-cutting measure with immediate results: profits increase, which means stock prices do, too.  

For now, the labor market remains strong despite increased layoffs, particularly at tech companies. There are a couple of theories to explain these layoffs, neither of which begin with the letter "R":

1. Scaling back after explosive growth. As we've mentioned and illustrate below, several technology companies ramped up hiring between 2018 and 2022 as the world went digital, particularly during the pandemic. The graph below illustrates the rate of growth among tech companies versus the recent rate of cuts. Apple, which showed slower signs of growth between 2018 and 2022, has yet to layoff.
2. Layoff contagion. We wrote about this type of phenomenon during The Great Resignation era in describing the high rate of job quits: When one employee leaves, the departure can have a ripple effect on others in the company. In many ways, we may be seeing a similar phenomenon with layoffs. As big companies lay off and stock prices increase as a result, it leaves other CEOs and Boards of Directors to ask, "should we be laying off too?"