Do layoffs in tech signal a broader economic meltdown?

We are living through a moment of economic upheaval. Signs are all around. Tech behemoths that have spent years expanding are now laying off thousands of workers. Is this a signal of a broader economic meltdown to come? Well, it's complicated.

Do layoffs in tech signal a broader economic meltdown?

Do layoffs in tech signal a broader economic meltdown?

We are living through a moment of economic upheaval. Signs are all around. Tech behemoths that have spent years expanding are now laying off thousands of workers. Is this a signal of a broader economic meltdown to come? Well, it's complicated.

Key Takeaways

  • 110-150k tech jobs have been cut in the last 6 months across ~900 companies.
  • When rates were low, investors poured into these riskier, higher-growth companies to clear their return thresholds, sending valuations, funding and burn rates (headcount) soaring to levels that were often untethered to business fundamentals.
  • What’s mainly driving tech layoffs is dramatic change in capital environments versus business performance, so it may be unlikely that the broader economy sees job losses as acutely as tech.

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Do the 110k jobs lost in tech signal a broader meltdown?

Throughout 2022 we've heard about and experienced high inflation and now it looks like 2023 is starting with a lot of big layoff announcements surprisingly from tech companies that have been hiring more than firing every month for over two years. Google just cut 12k jobs despite an expected profit over $60b in 2022. Spotify and IBM are amongst the long list announcing sweeping layoffs. Do the 110k jobs lost in tech signal a broader meltdown? What’s actually going on here? Well, it's complicated. Let's get into it.👇

110-150k tech jobs have been cut in the last 6 months across ~900 companies (depending on how you define ‘tech’). It’s extremely sad and scary for many people. These companies have collectively raised over $600b(!) Perhaps more startling is that many operators we talk to inside tech companies aren’t really sure whether to plan for a broader business downturn, and/or if their business is doing more or less fine. 

Take work platforms like DoorDash or Lyft who laid off ~2000 corporate employees in Q4. Gig work accounts for nearly 20m full-time workers in the US, and as much as one third of the entire US workforce (~50m Americans) earn some revenue from it. If these platforms are doing poorly, that’s presumably bad news for the economy at large right?

It’s not that simple. In Q3 2022, Lyft & DoorDash reported 22% and 33% revenue growth YoY respectively. In fact, looking across Q3 earnings generally, and hearing anecdotally from private companies, many aren’t doing as bad as the magnitude of cuts suggest. That’s in line with the broader economy (outside just tech companies), where unemployment is actually still at near record lows (3.5%) and real wages (adjusted for inflation) are down only slightly YoY. 

So what’s going on here? The Fed saw inflation at 9% fueled by record low interest rates, a red hot labor market, supply chain issues & war, and said, let’s make it more expensive for businesses & consumers to operate & buy things. Effectively the Fed knows it’ll create some job loss to curb inflation, but doesn’t want things to spiral out of control (like say the 9m+ layoffs during 08/09). 

Bringing the big tech balloon back to ground again.

Many tech companies are unprofitable and need external funding to stay alive. When rates were low, investors poured into these riskier, higher-growth companies to clear their return thresholds, sending valuations, funding and burn rates (headcount) soaring to levels that were often untethered to business fundamentals. Now rates have gone up, future cash flows are more heavily discounted, and public & private revenue multiples have significantly compressed. Shareholders in public companies are decrying ‘value destruction’ (even though a lot of that ‘value’ wasn’t real). Private founders see the prospect of down rounds and dilution, or even running out of cash. Both cut headcount, even if the business isn’t yet showing signs of slowing down.

Key points. Images generated by MidJourney.

The bottom line? It’s hard to predict whether things get worse from here. But given what’s mainly driving tech layoffs is a story of a dramatic change in capital environments versus business performance, it may be unlikely that the broader economy sees job losses as acutely as tech. These companies must obviously shoulder blame for the cuts, but it would’ve also felt irrational for them to turn down cheap capital. What is clear is that tech needs to stay better tethered to fundamentals and focus on paths to structural sustainability. Otherwise cycles or boom and bust repeat.

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