The deepening crisis in the high-tech industry also reaches the employees of the technology giants. Meta, Facebook’s parent company, is expected to announce this week the largest wave of layoffs in its history, amounting to thousands of employees, and it is not the only one. Just recently, the chip giant Intel announced an extensive layoff plan that is expected to lead to the separation of thousands of employees. In doing so, they joined other large companies such as Microsoft, Twitter and Snap that started similar processes. Apple and Amazon, for their part, announced a partial freeze on new recruitments. On normal days such a wave is bad news for the American economy, but these are different days.
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Inflation in the United States continues to be high despite the sharp interest rate hikes by the Central Bank (Fed). The tight American labor market and the shortage of workers, along with the high inflation, contribute to continuous pressures for wage increases, which in turn only increase the inflationary pressures in the economy even more. Only at the end of last week were published Employment data for October showed a significantly higher increase in jobs than expected – 261 thousand compared to an expectation of 195 thousand.
However, the rate of average wage growth decreased slightly and the unemployment rate rose slightly to 3.7% – still far from what the Fed would like to see to moderate inflation. Can the layoffs at the tech giants change the picture and cool the American labor market?
“The Fed would probably like to see an increase in the unemployment rate and a decrease in vacancies. In reality, this means more layoffs in the economy, but from a political point of view they cannot say this directly,” says Guy Beit-Or, the chief economist of Psagot Beit Investments. He estimates that the severe monetary tightening and the hawkish messages of the central bank officials will lead to the inevitable result of a recession. “This wave of layoffs in high-tech was expected,” he said, “and I estimate that it will only increase, and the consequences will also be felt here in Israel.”
“‘Recession’ is not a derogatory word”
Beit-Or explains that the major technology and media stocks are the main victims of the current round. This is reflected in the decline in the advertising market, and in the fact that households prefer to divert money from sustainable products to basic products. This affects the high-tech companies, which suffer from the high level of interest and see a decrease in economic activity. “When you look at Apple and Amazon for example, at least from my point of view as a macro-economist, they should present quite weak results in the coming year, under the assumption that the USA will indeed enter an economic recession. In my estimation, we are now seeing only the beginning of the wave of layoffs. A real crisis begins when the layoffs start to become more massive, and then we will also see the increase in the unemployment rate. I really doubt it will stop here.”
According to Beit Or Psagot, the Fed is beginning to achieve its goal of cooling the economy, but its road to its goal is still long. “The purpose of raising interest rates is to encourage households to switch from consumption to savings. When in the US you can get an annual interest rate of 5%-6% on a deposit, it starts to ‘move the needle’, and I estimate that the slowdown will increase in the coming months.
“The meaning will be another decrease in the profits of the companies which will be expressed in a decrease in the GDP – and this is the meaning of a recession. There has never been a cycle of interest rate increases that did not end in sharp declines in the stock markets and an economic recession.”
Beit Or’s forecast is that the impact in the macro data will appear in the first or second quarter of next year, when the wave of interest rate hikes by the Fed will also probably end.
Fed Chairman Jerome Powell / Photo: Associated Press, Manuel Balce Ceneta
In conclusion, Beit-Or says that “recession is not a pejorative word. When there is such stubborn inflation, the Fed must hit the brakes, and hard. We are changing direction from zero interest rates to higher interest rates, and the entire economy needs to align accordingly. History shows that when events like this happen, there are companies If they are fired, there will be those who will go bankrupt and there will be those who will prosper. This is part of the economic cycle.”
“It’s the magic circle in the coming year”
“There is a kind of reverse vicious circle here that we haven’t seen in a long time,” says CPA Lior Shahar, partner at BDO and head of the high-tech sector, a technology cluster at the consulting firm. “When there are strong employment reports, the markets fall. It makes a lot of sense since the thing that affects inflation the most is that you hardly see any layoffs in the American market, and the employment figures until now have been strong.”
Shahar explains that in the current situation the central bank does not have many maneuvering options. “The equation is simple, as long as the labor market is boiling, the Fed is expected to continue its tight monetary policy. As soon as mass layoffs begin, along with the fact that giants the size of Amazon are halting recruitment, I believe this will start to have an effect.”
That is, when that happens, the Fed, according to him, will begin to slow down the rate of interest rate increases to such an extent that within a year we can even talk about lowering interest rates. The way to balance the capital market in the coming year is through the weakening of the labor market, and only then will inflation balance out. “It must get there, otherwise the Fed will not abandon the aggressive approach of raising interest rates,” Shahar clarifies.
Will this process end in a recession? Shahar also agrees that apparently there is no choice. “Those layoffs will probably lead the American economy into a recession, mild or moderate. Before that happens, we won’t see a drop in inflation or interest rates. Bottom line, the Fed and the capital market want to see a cooling of the labor market to get back on track. This is the vicious circle in the next six months to a year.” .
Will the inflation data meet the forecasts?
Today, the consumer price index in the US for October will be published, after the previous two times the figures were above forecasts. Last week, after four consecutive interest rate increases of 0.75%, the Chairman of the Fed, Jerome Powell, indicated that it is too early to talk about the end of the wave of increases, and clarified Because in light of the latest inflation data, it is hard to say that the policy he is leading is too extreme. The pace may moderate, he hinted, but interest rate hikes will continue. He added that as part of risk management, it is better to tighten the policy too sharply and support the economy if it falls into a severe recession, than to ease it and face the danger that the inflation environment will remain high for a long time.
What is expected now? According to the forecasts, the monthly index will increase by 0.6% and the core index by 0.5%, which means that the annual inflation rate will decrease slightly from 8.2% to 8%. Core inflation, which does not include food and energy components, is expected to decrease slightly to an annual rate of 6.5% compared to 6.6% in September.