Tech Downsizes

The layoff announcements dropped one after another, accelerating throughout the second half of 2022. Amazon began laying off what will be 18,000 employees. Lyft, the ride-share company, said it would dismiss 700 of its workers, or 13 percent of its staff. The technology giants Meta and Twitter announced that they were cutting thousands of employees.

The new year brought even more bleeding in Silicon Valley: Last week, Google’s parent company, Alphabet, said it planned to lay off 12,000 of its workers, Microsoft said it would cut 10,000 employees and on Monday, Spotify said it would reduce its staff by 6 percent, about 600 people. Add up the losses and more than 216,000 tech employees have been laid off since the start of 2022, according to Layoffs.fyi, a site that tracks job cuts in the sector.

The layoffs have an ominous feel to anyone who is tracking news on the economy and the tumult in recent months relating to inflation, interest rates and the labor market. But the tech job cuts are not necessarily bad news for the economy overall, or even for Silicon Valley. (They account for about 4 percent of the tech sector’s total workers.) In today’s newsletter, I will explain what the cuts mean for the broader economy.

Boom and bust

To understand why tech companies are laying off workers now, turn back to the pandemic, when the industry was booming. In 2020 and 2021, sales spiked for companies like Amazon, as e-commerce took off and consumers who were suddenly spending much more time at home were buying goods at a record pace.

Demand for workers quickly escalated, and tech companies were competing against each other to hire talent. A virtual gold rush was on for engineers, according to my colleague Tripp Mickle, a reporter based in San Francisco who covers Apple and the tech industry.

As the pandemic waned, many companies faced a new problem: They had been on a hiring binge, but now they were confronting a possible recession — and heavy pressure from investors to scale back.

“Now, tech is in a position of resetting itself,” Tripp said. “But if you look at the fundamentals of most of these businesses, they remain pretty strong. It’s just that they went through a period of accelerated growth, and the ability to sustain that is difficult.”

Still, the layoffs contain at least one positive sign for the labor market: A lot of traditional industries need tech employees, so this is an opportunity for those companies to scoop up talent. The health care industry, the federal government, private companies in retail or manufacturing — all of them need engineers and other people with high-tech skills. What is Google’s loss could be Walmart’s gain.

But there are no signs that the layoffs will end anytime soon, especially as the Federal Reserve has suggested that it will keep increasing interest rates this year to try to cool the economy.

Early warning

Consider the tech industry’s place in the broader economy — and whether tech layoffs will spread to other industries.

One factor that makes the tech industry stand out is its dependence on valuation, since companies often raise a lot of money to pour into risky or unproven assets. Companies that are very forward looking tend to take a hit when interest rates increase, which could partly explain the waves of layoffs, Jeanna Smialek, a Times reporter who covers the Federal Reserve and the economy, told me.

The tech sector can be a leading indicator, telling us where the economy is headed before the rest of the economy goes there.

“You don’t want to dismiss tech layoffs as meaningless,” Jeanna said. “They can sometimes be the canary in the coal mine.”

But she also warned not to read too much into them. Besides being especially market-sensitive, the tech sector is a very small slice of the overall work force in the United States — about 2 percent of all jobs in the economy. Jobless claims overall remain very low, and more than 10.5 million jobs are open across the country.

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