More Layoffs On The Horizon? Does This Push Us Into A Recession?

Key Takeaways

• The unemployment rate rose in August from 3.5% to 3.7%, but employers still added 315,000 jobs.
• Strong labor reports have prevented the NREB from announcing an official recession because they look at the overall economy.
• Experts are worried that recent layoffs and hiring freezes among tech giants will impact the labor reports in the second half of 2022.

While many experts have expected an announcement that the U.S. economy is officially in recession due to rising inflation and an overall state of volatility and slowed growth, the National Bureau of Economic Research (NBER) has decided that we’re not officially in a recession yet.

Some economists quickly raised flags, pointing to two consecutive quarters of falling real GDP – the technical definition of a recession. However, other economists referenced the labor numbers as too promising a sign to make the official announcement. The NBER looks at the bigger picture, including the labor market, consumer and business spending, and incomes.

Are more layoffs on the horizon, though? Would this push us into a recession?

The Looming Recession Has Been Propped up by Good Labor Reports.

Part of the reason that the NBER didn’t call for a recession is that it hasn’t been all bad news with the economy. Many defend the economy’s strength at present. The theory being that as long as we all are making money, we should all have money to spend, and keep the economy rolling along. It’s difficult to call for a recession when there’s still money to be made by those looking for work.

However, some media outlets paint a different picture, running headlines about recent layoffs and the possibility of more cuts to come. The major concern is that announcements of layoffs could lead to a decrease in consumer spending, leading to lower reported earnings and potentially even more layoffs.

Will Labor Reports Soften Over The 3rd & 4th Quarter of 2022?

The major concern for those fearing a recession is that the labor reports may soften in the second part of 2022, removing the key economic driver that has been propping up the economy and keeping us out of a recession. Once the labor numbers turn, it would be difficult to claim that we’re not in a recession.

The critical question that everyone’s trying to figure out now is whether or not the labor reports will present bad news in the next two quarters. All we can do is work with the information we have in front of us.

According to the US Buereau of Labor Statistics, the unemployment rate rose 0.2% to 3.7% in August as the number of unemployed people increased to 6.0 million. However, employers added 315,000 jobs in August after adding 526,000 jobs in July. It also appears that payroll is now higher than pre-pandemic levels, which means that workers have more money to spend. If it weren’t for rising inflation, it appears that consumer spending would be up, still we can’t ignore the role of increasing inflation on consumer spending as folks brace themselves for what now seems like an inevitable downturn. It’s only natural that people limit discretionary spending when they fear that a recession is coming.

As we’ve seen in recent media headlines, it appears that many different companies have announced upcoming layoffs. Some major companies like Bed Beth & Beyond and SNAP have stated that up to 20% of their workforce will be laid off. Meanwhile, Apple, Tesla, Amazon and Meta are all announcing layoffs. While these numbers are significant, it’s uncertain whether they will have a large impact on overall employment numbers.

What’s going to make the unemployment numbers even more interesting is how quickly these laid-off employees from tech giants can re-enter the workforce.

How Important Are Labor Reports Relative to a Recession?

We recently wrote about how the economists at the International Monetary Fund (IMF) expect the U.S. to narrowly avoid a recession. Economists will continue to look at the overall economy, so when it comes time to declare an official recession, everything from labor reports to investor confidence will be considered.

Labor reports are important relative to a recession because if people aren’t making money, then they can’t spend money, at least not at the same rate. If you can’t spend money, then companies will continue to report lower earnings which will, in turn, damage investor confidence through further selloffs of shares. This consequently will result in companies laying off more employees as they try to adjust business operations to match consumer demand.

The Federal Reserve Chairman Jerome Powell recently came forward with a warning that the central bank’s battle against inflation will come with casualties. Some critics feel that this translates to putting people out of work, hurting small businesses in particular, since the cost of money will go up as interest rates increase. When the cost of money goes up, companies have to cut staff, hurting the labor report, which could be the final straw leading to a recession.

The fear is that the interest rate increases that are designed to slow the economy may increase unemployment from 3.7% to 4.6% or higher. The Fed has to balance the economy by focusing on bringing down inflation, which is done by raising rates. However, they can’t raise the rates so high that they hurt the labor market. This is where things get very unpredictable.

What Other Notable Layoffs Have We Observed Recently?

It can be challenging to make sense of labor reports because if we follow the media, we’re often bombarded with news of major cuts.

Recent, notable layoffs besides Apple, Tesla, Amazon and Meta:

• Bed Bath & Beyond is cutting 20% of it’s workforce.
• Snap, the parent company of Snapchat, is laying off about 20% of its workforce.
• Shopify let go 10% of its workforce in June of this year.
• Peloton announced on August 12th it was cutting about 780 jobs after previously letting go of 2,800 employees.
• Groupon laid off 500 staff members, about 15% of the total workforce.
• Robinhood let go 23% of its workforce with an estimated 700 roles being cut.

These layoffs are notable because they are the result of companies adjusting for decreased earnings, meaning that the economy is still in a downturn.

It’s easy to be discouraged about the economy when you see media reports about major companies laying off a significant percentage of their workforce, not to mention rising inflation. It’s also tempting to look at these cuts as an indicator that we’re heading towards a recession.

A major dilemma that we have to consider is that many tech companies had to increase hiring during the pandemic to match increasing demand, and adjust to new ways of doing business.

Not every industry or company will be impacted the same way by the concerns of a recession and rising inflation. Many companies in sectors like health care, utilities, and consumer staples tend to be more recession-proof and continue to perform well regardless of the economy’s health.

What Does This Mean For Investors?

Layoffs will impact your investing plans because companies are cutting employees due to reductions in earnings and out of fear for future earnings. Since the companies are making less money than expected, its share prices are decreasing which is bringing down the value. As a result, there are plenty of losses in the stock market. This leaves investors concerned since the volatility often leads to wild swings.

This doesn’t mean that you should give up on investing in the stock market altogether. Many companies are still able to produce strong financial results during times of inflation, even during a recession. We suggest that you switch up your investment style to plan for this. Take a look at Q.ai’s Inflation Kit and protect your investments from dropping in value. You don’t have to lose money just because of the state of the economy.

Better still, you can activate Portfolio Protection at any time to further protect your gains and reduce your losses, no matter what industry you invest in.

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