Are The Tech Layoffs The Start Of A White Collar Recession?

Key Takeaways

• There have been a huge number of layoffs across the tech sector so far this year, with some analysts suggesting it could be the beginning of a ‘white collar recession’.
• While not an official term, the idea is that we could see white collar workers, such as tech company employees, hit hardest by an upcoming recession.
• While a general recession isn’t a certainty, it’s looking more and more likely all the time. The Fed is committed to raising rates in order to bring down inflation, which is going to put continued pressure on economic growth.

The past few weeks have seen a wave of major layoffs across the tech sector. What started as a trickle at the beginning of the year with smaller tech companies like Shopify and Snap has now spread to the biggest, including Meta and Amazon.

That’s not to mention Twitter, where Elon Musk has whittled down a headcount of almost 8,000 to what appears to be about 7 engineers (that’s an exaggeration by the way, but it’s probably not too far off reality).

Much of the layoffs have been put down to over-hiring over the pandemic, but that’s not likely to bring much comfort to tech workers who are now out of a job. With a soft economy and the prospect of falling advertising revenues making many big tech companies nervous, it might not be too easy for them to walk into a new role.

It marks a major departure from the fortunes of engineers and developers, who’ve enjoyed huge pay packets and job perks as tech has boomed over the past decade.

While a formal recession hasn’t hit yet, if one does it could be white collar workers who are impacted the most, according to a senior economist at the Milken Institute.

Download Q.ai today for access to AI-powered investment strategies.

What is a white collar recession?

This isn’t an official economic term, but it’s a phrase that’s begun to do the rounds. Generally in a recession we see the labor market come under pressure. There are layoffs all across the economy and hiring freezes implemented at many companies, which leads to a higher unemployment rate.

A higher unemployment rate also means workers have less bargaining power for wages and benefits, which slows the rate of rising earnings. These factors combined means households have less money to spend, which further compounds the economic slowdown.

The thing is, the labor market has been a bit weird lately. Despite the fact that economic growth has been negative and inflation has been sky high, the unemployment rate has remained really low.

The idea behind a white collar recession is that they’re much easier jobs to downsize right now. Just like we’re seeing in tech. Companies like Meta and Amazon are able to streamline their headcount and reduce focus on certain units without impacting their core business.

This is more difficult in blue collar industries. Generally speaking these types of roles directly influence the output and revenue of a company. If you lay off a bunch of construction workers, construction projects won’t be finished on time. If you sack half your truck drivers, goods won’t get shipped.

So while all sorts of industries and employees will be impacted, this recession could hit white collar workers the most.

One of the key drivers of a white collar recession is the improvement in technology that has allowed for the replacement of a multitude of jobs. While automation in blue collar industries such as factory work has been ongoing, we’ve not seen a major jump in recent years. It continues to happen, but at a steady pace.

With rapid developments in technology such as AI, we’ve started to see the same thing happen with white collar work. It’s not at the point where many jobs are completely obsolete, but improvements in technology have allowed many workers to become more efficient, meaning a smaller team can now complete the work that required many more staff just a few years ago.

Are we heading for a recession?

All of this depends on whether we are actually heading for a recession or not. As I;’m sure you’ve read at some point over the past few months, the jury’s still out. The National Bureau of Economic Research hasn’t yet stated that we’re in a formal recession, even though the traditional measure of two consecutive quarters of economic growth has already been met.

The picture is a lot more nuanced now, with the unemployment rate remaining low and consumer spending holding up surprisingly well.

While it hasn’t happened officially yet, it’s likely that at some point over the next six months that we will enter a recession. The prospects for businesses aren’t looking great, but one of the key factors that is likely to tip the US economy over is the Fed’s interest rate policy.

That’s because the Fed is solely focused on bringing down inflation. In order to do that, they need to put the brakes on the economy. Even though it’s already sputtering, they’re going to be further looking to slow economic growth, which is almost certain to eventually send the U.S. into a recession.

So why are they doing it? Simply put, it’s the lesser of two evils. Chairman Jerome Powell has been very clear with this, stating that they understand that their interest rate policy is likely to damage the economy and send it into a recession.

When it comes down to the option of leaving the economy alone and watching inflation continue to runaway, or risk sending it into a recession but bringing down inflation, the Fed has decided that the inflation rate is the more pressing problem.

What investors can do about a collar recession

What choices do investors have should a white collar recession become a reality? Well, they could pick stocks that are in traditionally blue collar industries, such as automakers and manufacturing companies.

That comes with its own set of risks though, as there’s no guarantee that those sectors will be immune from a recession. Even if the sectors themselves avoid the worst of it, picking individual companies to invest might mean picking the wrong ones.

As is the answer most times when it comes to investing, diversification can help. But it’s not about diversification for the sake of it, it’s about an investment portfolio that has the ability to take specific positions based on the outlook for the economy.

Our Active Indexer Kit is a great option here. Our AI predicts the performance and volatility across the US market for the coming week, and then automatically rebalances the Kit based on these projections.

Specifically, it rebalances between large cap and mid/small cap stocks, and also adjusts exposure to the tech sector individually. A handy trick given all the tech sector volatility we’ve seen so far this year.

An added layer of safety is also available for this Kit, our AI-powered Portfolio Protection. For this, our AI analyzes your portfolio sensitivity to a range of different risks such as oil risk, market risk and interest rate risk, and then automatically implements sophisticated hedging strategies to protect your portfolio.

If you’re worried about how an upcoming recession could impact your money, this is a great way to provide some peace of mind.

Download Q.ai today for access to AI-powered investment strategies.