Technology companies under violent interest rate hikes in the United States: the number of layoffs in 3 months is nearly the total of last year

Management and efficiency are back in the spotlight for businesses.

Text / Ba Jiuling (WeChat public account: Wu Xiaobo channel)

One

Recently, bad news about the European and American economies has come one after another, the turmoil in the banking sector has not subsided, and the technology industry has ushered in a new round of large-scale layoffs. The wave of layoffs has been intermittent for months.

In the past two weeks alone, the two technology giants Meta and Amazon have successively announced the launch of the second round of layoffs, cutting another 10,000 and 9,000 employees respectively. Previously, they announced layoffs of 11,000 and 18,000 jobs in November and January, respectively.

Although widely described in the statement as a "deeply distressing decision," layoffs have become a common choice for many tech companies.

Data shows that in 2022, 1,052 technology companies around the world have laid off more than 160,000 employees. Since 2023, in less than 3 months, 527 technology companies around the world have cut more than 150,000 employees, and the momentum is obviously more ferocious.

The largest tech layoff since the pandemic Credit: Layoffs.fyi

Two

What is the reason behind the layoffs of technology companies? Analytically, it can be roughly summarized into three.

First, the Fed's violent interest rate hikes hurt technology companies.

The Fed just completed its latest round of interest rate hikes in the early hours of Thursday Beijing time, raising interest rates by 25 basis points.

This is its ninth rate hike since last March, accumulating 475 basis points of rate hikes over the past year, pulling the federal funds rate from near zero to a target range of 4.75%-5%.

This means that lending rates for technology companies have risen sharply, cash flow has tightened, and money has also caused capital flight from technology stocks.

The first landmine of the banking crisis, a key reason for the bankruptcy of Silicon Valley Bank, is that it is mainly the target of its services, and many high-tech companies are unable to obtain financing from the IPO market, and can only use past savings to survive. They withdrew their deposits, which caused Silicon Valley banks to "bleed" during the brewing crisis.

At the same time, the economic downturn and increased uncertainty have dampened demand and hurt corporate earnings.

Microsoft, for example, said that its Azure cloud business is growing slowly and its core businesses, including Windows and Office, have declined, so it plans to lay off 10,000 jobs by the end of March to better match its cost structure with revenue.

Judging from the concentrated earnings reports released by the technology giants in February, their performance suffered a collective decline.

For example, in the fourth quarter of 2022, Meta's net profit fell by 55% year-on-year; Alphabet's net profit fell 34% year-on-year; Microsoft's net profit fell 12% year-over-year. Amazon, on the other hand, posted a net loss of $2.7 billion in 2022, delivering its worst report card in history.

With declining performance and a poor economic outlook, layoffs became a natural choice.

Second, large-scale layoffs are related to technology companies' misjudgment of trends during the pandemic.

Zuckerberg's words are very representative. "At the beginning of the pandemic, the world was rapidly moving online, and the surge in e-commerce led to huge revenue growth," he said. A lot of people predicted that it would be a permanent acceleration, and I thought so, so I decided to significantly increase my investment. Unfortunately, e-commerce has resumed its previous trend, and the macroeconomic downturn, increased competition, and a decline in advertising business have led to much lower than expected revenues. ”

The pandemic has been seen by many companies as an opportunity to make a "leapfrogging" to their online business, preferring to bet on the wrong treasure rather than miss opportunities and be left behind by acting cautiously.

As a result, with profits in the early days of the pandemic, tech companies were keen on recruiting and expanding their businesses. The data shows that the number of employees at Microsoft and Google has increased by 60,000 and 70,000, respectively, in the past two years; The number of Meta employees has directly doubled from about 40,000 before the pandemic to 87,000...

Therefore, the wave of layoffs is largely a pullback from the overexpansion of the early days of the epidemic.

How fierce the expansion was at the beginning, how hard it was cut this time, such as Meta. Apple, by contrast, has avoided rapidly increasing its headcount in recent years, and the pace of layoffs is more modest than among its tech peers.

Third, behind the wave of layoffs is a shift in investor mentality.

For a long time, tech companies were in a window of high growth. With low interest rates and easier investment, entrepreneurs or CEOs can focus on "growth first" or try to invest in many new projects without worrying about efficiency.

Now, the environment has changed. It seems less easy for investors to pay willingly, and they become more cautious and pragmatic when investing.

As a result, management and efficiency have been brought back to the fore by the enterprise.

CEOs are now thinking more about optimizing management and cutting costs, projects that are costly and uncertain and difficult to contribute to cash flow in the short term are cut, businesses are becoming more focused, and companies are demanding more from the employees who remain.

Against this backdrop, the wave of layoffs shows no signs of stopping.

Three

Let's talk about a phenomenon: technology companies continue to lay off workers, while the unemployment rate in the United States is still at a relatively low level. How to understand this contradiction?

Data released by the US Department of Labor on March 10 showed that in February this year, the unemployment rate in the United States was 3.6%, compared with 3.4% in the previous month. February's unemployment rate, while rebounding, remains low.

Why is the impact of the layoffs not evident in the unemployment rate data?

This is first and foremost because the size of the labor force in the tech sector is a small percentage of the total U.S. workforce.

A report by Orient Securities pointed out that the US information industry labor force accounts for only about 2% of the total labor force of about 160 million, and "even if there is a wave of unemployment, it is difficult to make waves in the overall unemployment rate data."

U.S. Unemployment Rate and Labor Participation Rate Image source: Guosheng Securities Research Institute

If you look further at the non-farm payrolls (NFP), in February this year, the number of new non-farm payrolls in the United States was 313,000, which was significantly narrower than the previous value of 504,000, but still higher than the expected 205,000.

Among them, 105,000 jobs were created in the leisure and hospitality sector, a gap of 410,000 from before the pandemic; education and health services increased by 74,000; professional and business services increased by 45,000; retail industry added 50,000 jobs; and employment in the information industry decreased by 25,000.

Some people may wonder about the statistic "25,000 fewer jobs in the information industry", and the scale of layoffs in technology companies is obviously much larger than this.

In fact, this is because when technology companies terminate employees, they often continue to pay employees for several months (usually around 2-4 months) as compensation. Even if the employee has received the laundancing email, as long as they still receive the salary, they are still considered to be in employment when calculating NFP.

In addition, those high-tech talents who have been laid off are still popular with enterprises.

According to a survey by ZipRecruiter, nearly 80 percent of employees laid off from tech companies found a new job within three months of starting their job search, and nearly four-in-ten of them managed to re-enter the workforce in less than a month. About 74 percent of those employees stayed in the tech industry, but a significant portion turned to new outlets such as retail, financial services and healthcare.

Percentage of time spent by technology company employees to achieve re-employment (%) Image source: Orient Securities Research Institute

So, if an employee finds a new place to go while receiving compensation, the layoffs will not affect the NFP data.

In general, the impact of the wave of layoffs in technology companies, although it is seen in NFP, is still relatively small.

At the same time, the catering, tourism, medical and other service sectors still play a major supporting role in employment. The recovery of these industries after the pandemic has greatly increased the demand for relatively low-skilled labor, and even the inability to recruit people, which is the main reason why the unemployment rate in the United States has remained low recently.

On the one hand, the cold wave of layoffs in technology companies, on the other hand, the difficulty of recruiting workers in the service industry, this obvious polarization is indeed one of the magic pictures of the post-epidemic era in the United States.