US jobs market remains tight
The US labour market remains tight. More people continue to find their way into work and the unemployment rate remains near post-pandemic lows.
That has made the Federal Reserve’s job of restraining economic growth to tame inflation all the more challenging, but it is also the only reason there is still optimism that the central bank can deliver a ‘soft landing’ and avoid a harsh recession.
The Fed is willing to let unemployment rise if it helps ease inflation. In an ideal world, it would like the jobs market to stay strong and get inflation back toward its 2% target – but that is a tough goal to deliver. Fed chair Jerome Powell warned that the jobs market is ‘overheated’ following the latest interest rate increase, demonstrating that the Fed does see the strength of the labour market as a negative influence while inflation remains its top priority. The persistent buoyancy in jobs adds to the pressure to keep hiking interest rates aggressively and requires a sharper and more sustained fall in inflation to allow the Fed to pivot, whereas signals that the market is loosening would be welcome news for stock markets so long as they don’t go too far too quickly.
Where next for the US job market?
Higher interest rates are designed to put the brakes on economic growth, but this also raises the risk of a recession and causes consumers to pullback on spending and prompts businesses to cut costs, including through job cuts, in order to protect profitability.
The jobs market is defying the wider economic downturn, at least for now. However, there are signs that the Fed’s actions are starting to filter through and that it could be loosening as we approach 2023.
Non-farm payrolls grew more than anticipated in October, but it was the smallest rise we have seen in 22 months to suggest growth is slowing down. Plus, over half of those additions were made in sectors that are still trying to rebuild their workforces after being forced to let staff go during the pandemic, such as hospitality and leisure.
The unemployment rate has ticked up despite the job growth, although this remains within the tight band of 3.5% to 3.7% that we have seen since March, and the number of layoffs being made by corporations has been on the rise for three consecutive months and has hit its highest level since March 2021, according to the latest Challenger Jobs Cut report.
There is reason to believe that could rise further going forward. Following the string of job cuts we saw from the likes of Salesforce, Intel, Peloton, Snap and Ford in October, there have been reports that an array of big names including Disney, Juul, Salesforce, Zendesk, Chime, Lyft, Stripe, Opendoor and Upstart Holdings have all prepared job cuts since the start of November, according to a timeline compiled by Forbes.
Plus, we have seen the biggest companies from the tech space also start to crack in November. Meta has announced it is downsizing its workforce by 13% by cutting 11,000 jobs and Amazon is reported to be preparing to let 10,000 workers go. Meanwhile, thousands of workers have been ousted from Twitter following Elon Musk’s takeover.
Big Tech layoffs: expect more job cuts
Big Tech stocks, along with most businesses, are responding to the sharp and drastic shift in the economy in 2022 that has set the stage for another challenging year in 2023. This earnings season saw most of Big Tech deliver their slowest sales growth in years accompanied with bleak outlooks that point toward more pain.
With growth harder to come by and inflation still driving up costs, the focus is now gradually shifting to which companies can protect profitability during these tougher times by finding savings.
The ability to cut the fat will be more crucial going forward and Big Tech has plenty of fat to cut. Some could be considered obese after going on an over-zealous hiring spree as growth accelerated in the wake of the pandemic. Meta, Amazon and Alphabet’s workforces are all around twice as large as they were before the pandemic hit. Microsoft has seen its headcount rise by over 50%, while Apple’s has grown by 20%.*
(Source: Company reports. *Alphabet, Apple and Meta pre-pandemic figures are as of September 2019 while post-pandemic figures are from September 2022. Amazon’s figures compare December 2019 to December 2021, while Microsoft’s figures compare the headcount between the end of June 2019 and June 2022.)
Unsurprisingly, those that recruited most rampantly have been the first to try and shed staff. We have already seen markets react favourably to news that Meta and Amazon are looking to slim down their workforces. However, this is just the beginning and markets should expect more and probably deeper job cuts to be made going forward.
News that Amazon, which is far more labour-intensive than its rivals, is looking to let workers go ahead of the key festive season – which it has warned will be the most lacklustre on record – shows how gloomy the outlook is and suggests more could follow when ecommerce demand falters further in the new year. Meta has warned earnings will remain under pressure throughout 2023 and has even more reason to slimdown given it is committed to investing billions into its costly metaverse ambitions.
The other members of Big Tech that grew at a slower pace during the good times have also acted by at least slowing down recruitment or pressing pause on new hires. Alphabet said it would cut the rate of hiring by half in the current quarter and said this will slow even further in 2023 as it looks to ‘realign resources’. Apple is reported to also have imposed a hiring freeze on every department outside of R&D, potentially until the end of September. Microsoft has also been rejigging its workforce and has said it is aiming to improve employee productivity after already announcing a small round of job cuts.
That may spook some in the markets that the jobs market could be about to implode, but the recent Big Tech layoffs should be treated with caution when being read across to the wider economy. They appear to be far more bloated than other industries and could therefore be more vulnerable than smaller businesses in the current environment as they have a greater need to downsize. Tech only accounts for a small proportion of total employment and is still hiring in key areas. They will undoubtedly contribute to more layoffs in 2023 but we will need to see cuts being made across many other industries for the jobs market to loosen.
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