Why tech layoffs aren’t a true sign of a labor market slowdown

By Stock News On Jan 24, 2024 20 0

More than a dozen companies have conducted layoffs since the start of the year.

Google (GOOG, GOOGL) trimmed a small part of its staff on Monday, for instance. And on the same day, Amazon (AMZN) slashed workers from its Buy with Prime unit, marking the latest in a trend of cuts across major companies to start the new year.

But economists don’t see these job cuts as a firm sign the labor market is headed for an outright downturn. So far, that is.

“What you see in the news in terms of companies announcing layoffs and what you see in the economic data are not necessarily the same thing,” explained Neil Dutta, head of economic research at Renaissance Macro.

In other words, the bark of headlines about layoffs may simply be harsher than the actual bite.

Case in point: The most recent reading of weekly unemployment claims showed the lowest number of filings since September 2022. The consistency of this weekly data has been crucial for economists searching for signs of cooling in the labor market.

Dutta noted that the layoffs right now aren’t “particularly widespread” and the amount of workers cut appears to be smaller than the tech layoffs seen at the start of 2023.

Jefferies US economist Thomas Simons said companies announcing layoffs — and actually making the move — don’t always happen at the same time. They can show up with a lag in the data, or not at all, depending on how significant the layoffs are.

Also, given the strength of the economy, Simons added, Americans might not be rushing to file for benefits. A consistently low unemployment rate could give laid-off workers confidence that they can get hired again quickly.

“Reassuringly, the job-finding probability of unemployed workers remains in line with its pre-pandemic level, suggesting that the labor market remains strong and job opportunities remain plentiful,” a Goldman Sachs team of economists wrote in a research note to clients on Monday.

Simons also highlighted that higher-than-average wage growth in recent years — and households coming from a stronger financial position than at other comparable times in history — could support Americans when they are let go from a job. “There’s probably a good number of people in this sort of middle or upper middle class who get laid off from a job and just won’t bother to file for unemployment insurance,” Simons told Yahoo Finance. “It may not be worth it to them.”

“There isn’t a lot of worry. If [layoffs] start to kick up,” he added, “we might see … catch-up unemployment filings. For now, it’s kind of a different.”

Indeed, the latest projections from the economics team at Goldman Sachs, which doesn’t believe the US will enter a recession in 2024, show economic growth of at least 2.2% in each of the first two quarters of this year.

To Dutta at Renaissance Macro, this is the key to why the economic data may never catch up to the headlines. Economic growth stimulates further job growth, Dutta said.

“If the economy is growing, it’s hard to see that much in terms of labor market weakness,” Dutta said.

The last shoe?

There are signs of slowing in the labor market that worry some economists.

For instance, Deutsche Bank senior economist Brett Ryan — whose firm still predicts a mild recession in the first part of 2024 — said that while the layoffs aren’t yet in data, there are other labor market indicators signaling a cooling off.

For one, job growth as a whole has narrowed. Deutsche Bank’s research reveals that gains in two sectors — leisure as well as private health and education — account for 95% of the private payroll gains in the last six months. The narrow breadth could project slowing growth moving forward as those sectors reach a post-pandemic balance.

That potential slowdown, combined with a declining hiring rate, makes weekly jobless claims, or other metrics that measure layoffs, the “shoe that hasn’t dropped yet,” said Ryan.

“Firms are reluctant to lay off employees because of the sort of scarring experience of having to rehire them after the pandemic,” Ryan said. “But the question is, how long can it last?”