CEOs were cautious when announcing the layoffs that made headlines last week. They blamed one thing above all else: an impending economic downturn.
The CEO of PagerDuty, a cloud computing company, said on January 24 that the organization was cutting 7% of its jobs “to weather the current economic uncertainty” despite the company’s “strong growth” over the past two years and that its growth has improved the operating margin. . Amazon has decided to cut 18,000 jobs “given the uncertain economic climate,” CEO Andy Jassy told employees Jan. 4. Meta CEO Mark Zuckerberg said Nov. 9 that the company would cut 11,000 jobs due to the “macroeconomic slowdown.”
But the question that many economists were asking today (February 3) was: what economic slowdown?
The jobless rate in January was 3.4%, a 50-year low, as the US economy added 517,000 jobs, according to the Bureau of Labor Statistics, more than double the 188,000 economists expected. Apart from the news sector, which includes both technology and media and lost 5,000 jobs last month, almost every other industry added thousands of jobs – or hundreds of thousands in the case of leisure and hospitality businesses.
“I worry that business leaders will look around and see that everyone is taking preventative action, and that’s why they’re also taking preventative action,” says Elizabeth Crofoot, senior economist at Lightcast, a company analysis of employment data. “There is a risk that we are heading into a recession if everyone pulls back a bit.”
A recession, according to the National Bureau of Economic Research (NBER), is a “substantial decline in economic activity” that spans all sectors and lasts more than a few months and is officially identified by the agency. But many of the data points the NBER uses to call a recession, including job growth and gross domestic product, have been strong lately. U.S. gross domestic product grew 2.9% in the fourth quarter of 2022, following a 3.2% growth rate in the third quarter. And in December 2022 there were 11 million vacancies, the government said earlier this week, more than in any of the previous four months.
That said, by most standard measures, the US economy is doing well. And the parts that seemed weak are directly related to how CEOs feel. About 98% of CEOs surveyed by the Conference Board said they expected a recession in the United States at the start of the fourth quarter of 2022. The reasons for this are not entirely clear, but could relate to how the federal government has responded to recent inflation.
Many economists cite inflation as a reason to worry about a recession because the Federal Reserve will raise interest rates to fight inflation, which will increase the cost of borrowing. But inflation is also a sign that the economy is strong enough. Inflation, broadly defined, occurs when too much money drives out too few goods; in recent months, wealthy American consumers have spent so much money that businesses have been unable to keep up. (CEOs have also likely contributed to inflation by raising prices.) The Federal Reserve responded last year by raising interest rates at the fastest pace since the 1980s. That makes borrowing more expensive. – for consumers who might want to buy cars or houses, but also for large companies.
And that might help explain the CEO’s scare tactics a little better. Interest rates are at their lowest since around 2010, making borrowing costs extremely low for businesses. Rising interest rates have made borrowing more expensive for businesses, while a tight labor market has forced them to raise wages. According to Bureau of Labor statistics, workers earned an average of $33.03 an hour in January, up from $31.63 a year ago.
As a result, companies are “not ready to take the same risks as before,” says Crofoot.
CEOs have been rewarded for their risk aversion in recent months. Amazon’s stock price rose 25% after the job cuts announcement, helped in part by this week’s report that the company posted 9% revenue growth in the fourth quarter to 149, $2 billion. In its latest earnings report, Meta also reported higher earnings than analysts expected. The stock price is 75% higher than it was on Nov. 9 when the layoffs were announced.
Around 11,000 Meta employees may have lost their jobs, but Mark Zuckerberg’s net worth has also recovered as a result. He is now worth about $70 billion, according to Bloomberg, about $20 billion more than in November, when he warned of an economic slowdown.
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