How Layoffs and Slower Consumer Spending Impact the Global Economy

Even though layoffs are hard on individuals, investors should keep the bigger picture in mind when assessing the long-term performance of their portfolios. History shows that these periods can often set the stage for future business cycles. So while job losses may seem dire in isolation, they might ultimately lead to new opportunities and growth. This is especially true as workers with specialized skills reallocate to where they’re valued most. Investors should remain mindful of this fact, and approach job cuts with a balanced perspective.

Companies are announcing more layoffs as they respond to slower sales and profitability. So far, large job layoffs have been focused in the technology and consumer-related industries as a result of overhiring during the pandemic recovery period, when demand was abnormally high. Investors and analysts are divided on whether this will have an impact on the overall economy. With markets already anticipating a minor recession in 2023, how should long-term investors approach this topic in the coming year?

The economy has slowed over the past year

There is no doubt that the economy has slowed from its brisk post-pandemic pace, which spurred corporate overexpansion and, maybe, overconfidence. According to recent GDP figures, the economy increased 2.1% in 2022, compared to 5.9% the previous year. From a macroeconomic standpoint, this is the effect of the traditional culprits that have reduced consumer and corporate confidence: inflation and Fed rate hikes. As the housing market adjusts to increasing interest rates, this has been especially severe on the category of residential fixed investment. Similarly, consumer spending declined at the end of last year, with retail sales down 1.1% in December and personal consumption expenditures falling 0.1% in November and 0.2% in December, adjusted for inflation.

Consumer spending both influences and is influenced by the labor market. Strong consumer spending drives revenue growth and creates expansion incentives for businesses. In the past few years, as households spent their pandemic savings and stimulus checks and took on more debt, the technology and consumer sectors reaped the greatest benefits from these trends. This resulted in a record number of job openings and robust wage increases. In December, the average hourly wage increase was about 5% compared to the previous year - not better than inflation, but still positive.

Even while personnel levels are still generally greater than they were previously, these industries are currently seeing layoffs as consumers cut back on discretionary purchases, notably on personal computers and home furnishings. Large big giants, like Alphabet, Meta, Microsoft, Amazon, and Salesforce, are laying off thousands of employees, between 2 and 10 percent of their total workforce. Even among established businesses such as Coinbase, which is laying off 20% of its workers, layoffs have been significantly more severe in troubled industries like crypto. Outside of the IT industry, other companies, including Dow, 3M, Hasbro, and Wayfair, have announced comparable job layoffs.

Job gains have slowed with sectors such as Information experiencing layoffs

Even though layoffs are never pleasant for employees or businesses, investors must keep a broad viewpoint to comprehend how they might impact markets. Whether these layoffs are the result of larger economic factors like slowing growth and the Fed's fight against inflation rather than just being the result of overhiring in certain industries will determine whether they have a cascading effect on the rest of the economy. There are a few important details to remember.

First off, while these mass layoffs, numbering in the hundreds of thousands, are significant on their own, the general economy gained 4.5 million net new jobs in 2022, 6.7 million in 2021, and an average of 2.3 million jobs annually in the ten years prior to the 2020 recession. Even if it has had a significant impact on certain sectors, the economic impact has so far been limited, much like the early 2000s tech boom. The latest round of layoffs can be thought of as a "white-collar recession." Manufacturing and even the leisure and hospitality industries have not yet experienced significant employment cuts.

Second, there are indications that the rest of the economy can continue to be strong, though it is yet too early to say for sure. Despite a slowdown in GDP in 2022, the second half of the year saw strong expansion. Over the same time frame, inflation has been declining, raising the possibility that the Fed will stop raising interest rates later this year. And while many anticipate stagnant GDP growth in 2023, few anticipate anything more severe than a little downturn.

Household debt is growing

Third, despite presently improving, consumer confidence has been impacted by high costs. Whether this persists will largely depend on the debt loads that many people are already carrying in the midst of rising mortgage rates and indications that delinquencies may be increasing in areas like personal and vehicle loans. Nevertheless, debt levels today remain far below those that sparked the financial crisis of 2008.

In the end, economic downturns and job losses are a normal part of the business cycle. Workers are reassigned during these times to positions where they are most valued, especially those with advanced training and highly specialized abilities. Particularly, workers will continue to switch businesses and even industries in sectors like tech that may have overexpanded recently, eventually establishing a new equilibrium. This creates the conditions for future expansion, just as it has throughout history.