The labor market ballooned in January when the US economy added an astonishing 517,000 jobs, blowing past Wall Street's expectations. But at the same time, a slew of corporate layoff announcements have prompted questions about whether there could be a broad slowdown on the horizon.
So what's going on?
It's a tech thing: Many of the companies that have recently announced layoffs — like Google, Zoom, Meta, Microsoft, IBM, Intel and Amazon — hired aggressively due to an uptick in demand during the pandemic. But the post-pandemic return to the office means there's far less need for worker connectivity and online shopping. That's left these high-value companies overstaffed and out of balance. Now, they have to respond to investor pressure to cut costs. And that means cutting jobs.
In an assessment of fourth-quarter earnings calls, Goldman Sachs economists found that "many firms were pessimistic on the labor market," though they noted that "a majority of firms are actually discussing the high profile [tech] layoffs themselves but not indicating that their own companies will be laying off or have laid off any workers."
It makes sense that these so-called "loud layoffs" are have a chilling effect on the rest of the market — even though they aren't actually indicative of bad news for the entire economy.
Still, the finance sector is also having a difficult time. Goldman Sachs CEO David Solomon cut about 3,200 jobs last month and JPMorgan recently laid off hundreds of mortgage employees.
Contagion: Tech and finance layoffs do have a ripple effect, and CEOs expressed that concern during recent earnings calls.
"It's hard to avoid all the headlines that we're seeing day in, day out. And it's fair to say that there have been a number of large names that have announced major layoffs," said payroll processing firm ADP. "It's tough to say that... Some of those people making those layoffs are our clients."
Alaska Air Group also noted a smaller number of tech workers and tech companies using their airline. In San Francisco, apartment rents have fallen and tech layoffs have further weakened the housing market.
Manufacturing layoffs: While tech layoffs may not be a leading recession indicator, a decrease in manufacturing hiring could be an ominous sign of things to come.
The ISM manufacturing index declined by more than expected in January, to its lowest level since May 2020. Production, new orders, and employment components all weakened.
In fact, US manufacturing may have already contracted into a recession, said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.
And manufacturing is typically where full recessions begin.
"Weak manufacturing order books flash a recession warning, indicating that Fed tightening may be having an effect and unemployment may soon rise, stamping out services momentum," she said.
What's next: Investors looking for clarity on a confusing labor market are unlikely to find it in the frequently revised, high-frequency weekly jobless claims data on Thursday.
A recent rise in initial claims underscores that the rehiring rate has fallen, said Liz Ann Sonders, chief investment strategist at Charles Schwab. Most companies haven't been laying off workers in massive waves, but those who have lost their jobs aren't easily finding new ones as fast, she added.
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