Dominoes are starting to fall in the US economy.
While the Federal Reserve is slowing the economy, many US companies are retreating. There is a growing fear that as the central bank aggressively raises interest rates to combat high inflation, it could lead the US economy into a recession, and leaders cut back.
A number of companies have announced cuts or layoffs in just the last two weeks. They range from Tesla and JPMorgan Chase to Redfin and Coinbase.
Netflix last week announced a second round of cuts for the year, this time eliminating around 300 positions. Earlier this year, the entertainment company announced that it had lost subscribers for the first time in more than a decade. Since then, Netflix has eliminated approximately 450 positions.
A key question in the minds of many economists is whether this is the tip of the iceberg with many more cuts on the way, or whether it will stop here – a much-needed foam cleaning from a sizzling economy.
The labor market is “unsustainably hot,” says the Fed chief
Fed leader Jerome Powell says he and his colleagues are trying to stabilize a labor market that is “unsustainably hot.” Wages have risen rapidly in an economy where unemployment is 3.6%, which is very close to the lowest level before the pandemic.
“You have two vacancies essentially for each person actively seeking employment, and that has led to a real imbalance in wage negotiations,” Powell said when answering questions at a news conference two weeks ago.
The Fed chair is aware of the pain that will be inflicted on more people as he struggles with inflation and tries to tame it.
“We are not looking to put people out of work,” he said. “But we also believe that you really can not have the kind of labor market we want without price stability.”
So far, job cuts have largely been limited to a few industries, according to Andy Challenger, senior vice president of Challenger, Gray & Christmas, a company that tracks layoffs across the country.
– We have not seen such large cuts yet, he says. “But we are seeing these huge increases in layoffs in a handful of industries that to us seem to be potentially ready for the rest of the economy if things slow down significantly over the next few weeks and months.”
Pandemic darlings cut the most
Many new layoffs have come from what have been hot parts of the high-growth economy that did particularly well during the pandemic.
For example, the fitness equipment company Peloton took off when the gyms closed. Similarly, Netflix’s popularity increased when people got stuck at home watching TV shows and movies.
But now people are going out for entertainment, cinemas and gyms are open, and fewer people need expensive exercise bikes. In February, the CEO of Peloton resigned, and the company cut almost 3,000 positions.
Similarly, the Robinhood trading app attracted millions of investors, who opened new accounts during the pandemic. People were flushed with money from large stimulus checks from the federal government. Others saw the bank balance balloon from reduced travel and eating at home. The stock market was hot and many wanted to trade.
Robinhood hired aggressively to keep pace with this growth, sixfold, from 700 people to around 3,800, said CEO Vlad Tenev.
Two months ago, Robinhood laid off 9% of its employees. Tenev said he is now examining the company’s growth targets for the number of employees.
“Doing so allows us to be more resilient in difficult times, and stronger in the good times,” he said in a note to Robinhood staff.
Technology, housing, crypto are other points of termination
Tesla CEO Elon Musk, who reportedly told employees he had a “super bad feeling” about the economy, announced plans to cut the car company’s paid workforce by around 10%.
Several other technology companies, including Cameo, Carvana and the payment company Bolt, have also reduced staffing.
Perhaps no industry exemplifies the speculative abundance of recent years other than crypto, which increased in size as the value of Bitcoin and other cryptocurrencies increased. But in June, during strong sales, a number of crypto companies declined.
Crypto.com reduced its staff by 5%, and Gemini, the cryptocurrency exchange run by Cameron and Tyler Winklevoss, reduced its staff by 10%. Coinbase, which operates one of the largest crypto exchanges in the world, laid off more than 1,000 people, or close to 20% of the workers.
“We were growing too fast,” CEO Brian Armstrong told his staff. “Our employees’ costs are too high to deal effectively with this uncertain market.”
As mortgage rates rise at the fastest pace in history, heads are rolling towards mortgage lenders
Another part of the economy that suffered during the pandemic was the housing market. When the Federal Reserve cut interest rates to close to zero, borrowing costs were cheap and many people were looking to relocate.
But this year, the residential landscape has changed dramatically. The average interest rate for a 30-year fixed-rate mortgage is approaching 6%, compared with just over 3% at the beginning of the year. There has been a decline in mortgage applications, as a result, and there has also been downsizing in the industry.
JPMorgan Chase lays off hundreds of employees who work with mortgages. The staffing decision “was a result of cyclical changes in the mortgage market,” according to Shannon O’Reilly, a spokeswoman for the bank.
Earlier this month, real estate agent Compass cut 450 employees, or about 10% of employees, and Redfin reduced the total number of employees by 8%.
“A layoff is always a terrible shock, especially when I said we would go through heck to avoid one,” Redfin CEO Glenn Kelman wrote in a note to employees. “But mortgage rates rose faster than at any time in history.”