The dominoes are starting to fall in the American economy.
As the Federal Reserve puts the brakes on the economy, many American businesses are pulling back. There are growing fears that by aggressively raising interest rates to fight high inflation, the central bank could tip the US economy into a recession, and leaders will cut spending.
A host of companies have announced job cuts or hiring freezes in the past two weeks alone. They range from Tesla and JPMorgan Chase to Redfin and Coinbase.
Netflix last week announced a second round of job 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 over a decade. Since then, Netflix has cut around 450 posts.
A key question on the minds of many economists is whether this is the tip of the iceberg with many more job cuts to come, or whether it will end here – a much needed scum that emerges from a boiling economy.
Labor market ‘unsustainably hot’, says Fed chief
Fed Chairman Jerome Powell said he and his colleagues were trying to stabilize an “unsustainably hot” labor market. Wages have been rising at a rapid pace in an economy where the unemployment rate is 3.6%, very close to its pre-pandemic low.
“You basically have two vacancies for every person actively looking for a job, and that’s led to a real imbalance in salary negotiations,” Powell said when answer questions at a press conference two weeks ago.
The Fed Chairman is aware of the pain that will be inflicted on more people as he fights inflation and tries to tame it.
“We’re not looking to put people out of work,” he said. “But we also think you really can’t have the kind of labor market that we want without price stability.”
So far, the layoffs have been mostly limited to a few industries, according to Andy Challenger, senior vice president of Challenger, Gray & Christmas, a company that tracks layoffs nationwide.
“We haven’t seen a huge amount of cuts yet,” he says. “But we’re seeing these big increases in layoffs in a handful of industries that we think are potential indicators for the rest of the economy if things slow down significantly in the weeks and months ahead.”
Pandemic darlings cut the most
Many recent layoffs have occurred in sectors of the economy that have been hot and fast growing and have done particularly well during the pandemic.
For example, exercise equipment company Peloton took off when gyms closed. Similarly, Netflix’s popularity skyrocketed when people were stuck at home watching TV shows and movies.
But now people are going out for entertainment, movie theaters and gyms are open, and fewer people need expensive exercise bikes. In February, Peloton’s CEO resigned and the company cut nearly 3,000 jobs.
Similarly, the Robinhood trading app attracted millions of investors, who opened new accounts during the pandemic. People were filled with money from big stimulus checks from the federal government. Others have seen their bank balances increase due to reduced travel and meals at home. The stock market was hot and many wanted to trade.
Robin Hood hired aggressively to keep up with that growth, which grew sixfold from 700 people to around 3,800, CEO Vlad Tenev said.
Two months ago, Robinhood laid off 9% of its staff. Tenev said he is now reviewing the company’s workforce growth targets.
“It allows us to be more resilient in difficult times and stronger in good times,” he said in a memo to Robinhood employees.
Tech, Housing, Crypto Are Other Layoff Hotspots
Tesla CEO Elon Musk, who reportedly told employees he had a “super bad feeling” about the economy, announced plans to cut the automaker’s salaried workforce by around 10%.
Several other tech companies, including Cameo, Carvana and payments firm Bolt, have also downsized.
Perhaps no industry exemplifies the speculative exuberance of recent years than crypto, which has swelled in size as the value of Bitcoin and other cryptocurrencies rose. But in June, during a strong sell-off, a number of crypto companies reduced their activities.
Crypto.com cut its workforce by 5% and Gemini, the cryptocurrency exchange run by Cameron and Tyler Winklevoss, cut its workforce by 10%. Coinbase, which operates one of the largest crypto exchanges in the world, has laid off more than 1,000 people, or almost 20% of its employees.
“We grew too fast” CEO Brian Armstrong told his employees. “Our payroll costs are too high to effectively manage this uncertain market.”
As Mortgage Rates Rise at Fastest Rate in History, Heads Roll at Home Lenders
Another part of the economy that has taken its toll during the pandemic has been the housing market. As the Federal Reserve cut interest rates to near zero, borrowing costs were cheap and many people were looking to move.
But this year, the housing landscape has changed dramatically. The average rate for a 30-year fixed-rate mortgage is approaching 6%, compared to just over 3% at the start of the year. As a result, there has been a drop in mortgage applications and there have also been job cuts in the industry.
JPMorgan Chase is laying off hundreds of employees who work on home loans. The endowment decision “was the result of cyclical changes in the mortgage market,” according to Shannon O’Reilly, a spokeswoman for the bank.
Earlier this month, real estate brokerage Compass cut 450 employees, or about 10% of its workforce, and Redfin reduced its overall workforce by 8%.
“A layoff is always a terrible shock, especially when I said we would do everything to avoid one,” wrote Redfin CEO Glenn Kelman, in a note to staff. “But mortgage rates have risen faster than at any time in history.”