Labor costs are a thorn in any company’s side when it seeks unadulterated profit goals, but they become a much bigger problem for the broader economy when too many company’s cut too deep at the same time.
A recent note from the leading provider of financial services to the Royal Bank of Canada, RBC Capital Markets, warned that the spikes in tech-related job layoffs over the past couple of years could have rippling effects outside of the tech sector.
What caught our attention was the spike in layoffs for technology companies which wasn’t as bad as those seen in late 2022 and early 2023, but otherwise rivals some of the worst spikes this industry has seen over time.
RBC’s analysts
Before COVID-19 growth markets like deliver, e-commerce, and entertainment were on a steady upward trajectory that was only super-fueled by the stay-at-home mandates of the pandemic and without any clear time frames on normalcy, tech companies gorged on the opportunity to maximize profit.
Many companies extended their payrolls, hired on contractors, and subsidized their earlier office leases with an army of work-from-home soldiers that paid their own heating, air conditioning, electricity, lunches, etc.
Nevertheless, a little over two years ago, market analysts feared a massive recession would ensue now that a new normal was emerging after the once-in-a-generation pandemic. As people began to crawl out of their quarantine holes, the markets that were juiced by the situation were coming back down to normal usage patterns which meant companies were taking on overhead rapidly.
In preparation of an economic downturn, many tech companies slashed their head count by the hundreds at a time to keep a balance between profitability and viability.
Microsoft cut 10,000 jobs in 2023, and another 1,500 in June of 2024 which exists outside of its massive studio cuts from its recently acquired Activision Blizzard gaming business where the company also shed 1,900 employees across several positions. Google joined the pot of recently released employees with its own 10,000 cut. Amazon cut over 9,000 jobs in 2023, Dell slashed more than 12,500 jobs, and Intel dropped 15,000 from its payroll earlier this year.
But, without an actual concrete recession in place, the resulting higher-than-normal leveling off of tech jobs is indicative of a cooling labor market with payrolls number failing to meet expectations over the past few months.
With tech companies not rehiring at expected levels, RBC sees a shift in investor sentiment in the sector as some start to rotate out of technology and into more defensive areas like utilities and staple businesses that weather better in speculative economic times.
The overall level of layoffs moved up in August, but remained well below the spikes associated with past recessions, and was even a bit below the moves higher seen in 2023-2024 and 2015
RBC Analyst
2024 has seen noteworthy performance of defensive sectors as a signal of an investor shift ahead of a US presidential election where economic polices sit in opposition of each other, as well as rumored interest rate cut announcement from the US Federal Reserve.
Beyond the big money players toying with electronic funds, the real-world consequences of massive tech layoffs will soon rear its ugly head as they buying power of many people suddenly becomes constraint when they can’t find equivalent means of financial security. With a large swath of the consumer market primed to drop out from it as a result of layoff, businesses are about to enter into a vicious cycle of cut and adjust that may only end when investors feel confident again in the tech sector.
