Are Tech Layoffs a Sign of a Recession?

It seems lately that every other day we either hear or read that a major technology company has laid off thousands of employees. But are these cuts a warning of an impending recession? Technically we were in a recession in 2022 when the economy shrank for two consecutive quarters; however, the government would not recognize it as a recession, and one of the major reasons for that was the thriving job market, which had nearly two jobs for every unemployed human in the country.

We saw growth again in Q4, which proved the powers that be were right about the two-quarter blip we saw in in 2022. Again, was this a mild warning shot of the storm to come? Economists predict that there is a 70 percent chance of a true recession in 2023. Taking a step back, can we attribute the layoffs for Big Tech as a key indicator that these companies are getting ahead of the curve for the purposes of profit preservation and sustained quarterly performance?

My opinion is no. Here is why: It seems somewhat incredible to think that COVID and the shutdown of the entire planet is now entering its third anniversary. The entire world was catapulted into a new way of living, coping, working, consuming and behaving. When I reflect on what was achieved on a global scale nearly overnight, it's somewhat of a fire drill for how fast the world and its eight billion inhabitants can react to an emergency for the purposes of the preservation of life.

Regardless, as commerce does, it reacts to the macro market, economic and political influences, and COVID was one of global proportions. As consumers were forced into lockdown, their behavior and consumption changed. Big Tech recognized this and began to realign their roadmap for a more immersed digital future for all of us.

They fattened up their labor force and began developing toward a fragmented, virtual-based reality that consumers would see as the future of using the internet. They believed that the fear of direct human interaction was going to change the way we consume all aspects of our lives, from eCommerce to relationships. Their opportunistic thought process led them to release products that would support such a world, while capturing more of our user engagement they so deeply crave.

However, when Facebook invested $15 billion into the metaverse, it barely managed to drive 280,000 monthly active users. The metaverse is something that is enjoyed by the much younger generation -- Roblox and Minecraft are prime examples -- but their audiences are not at a financial consumer stage yet to warrant the levels of investment required to mass scale the complete digitalization of society, nor do they hold that captive audience.

As the consumer base for Big Tech began to return to work, go back to the movies and the mall, they realized that society, despite the impact COVID may have had for a period, was not ready to spend such a large part of their time consuming through a complete digital avenue.

I believe this is the driving force behind why technology companies are now laying off workers at an almost identical percentage based on gross employee headcount.

There is one thing to note here: A byproduct of such behavior could be that these layoffs actually act as a stimulus to an impending recession, such as the implications of tens of thousands of layoffs for some of the best paid workers in the U.S., further supply chain reductions in demands, consumer spending, and economic activity from these workers. We could see a chain reaction affect other companies and businesses, and that would be the beginning of the domino effect within the employment market and macro economy.

What we must hope for is the successful redeployment of these workers into other companies or the potential spark of further entrepreneurial behavior amongst such talent. When you consider that venture capitalist money invested $238 billion into startups in 2022, and $675 billion globally invested in 2021, there is still plenty of capital both domestically and internationally to support the successful redeployment of this labor into other companies.

We are living in a very unusual economic time where typical market indicators are no longer enough to make accurate predictions. I do personally agree with the economic outlook that there is a 70 percent chance of a recession. Rather than the above being cause for this, other major market indicators, such as the defaults in consumer car payments due to inflated car prices are more likely to be a reason that people are forced into a financial bind with macro-economic consequences.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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