The dominos are starting to fall in the U.S. economy.
As the Federal Reserve pumps the brakes on the economy, many American companies are retrenching. There is a growing fear that as the central bank aggressively hikes interest rates to fight high inflation, it could tip the U.S. economy into a recession, and executives are cutting back.
A host of companies have announced job cuts or hiring freezes 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 job cuts for the year, this time eliminating around 300 positions. Earlier this year, the entertainment company announced it had lost subscribers for the first time in more than a decade. Since then, Netflix has eliminated roughly 450 positions.
A key question on the minds of many economists is whether this is the tip of the iceberg with a lot more job cuts coming, or whether it will stop here – a much-needed froth clearing from a sizzling economy.
Job market is “unsustainably hot,” says Fed chief
Fed Chair Jerome Powell says he and his colleagues are trying to stabilize a job market that is “unsustainably hot.” Wages have been rising at a fast clip in an economy where the unemployment rate is at 3.6%, which is very close to its pre-pandemic low.
“You have two job vacancies essentially for every person actively seeking a job, and that has led to a real imbalance in wage negotiating,” Powell said when answering questions at a press conference two weeks ago.
The Fed chair is aware of the pain that will be inflicted on more people as he wrestles with inflation and tries to tame it.
“We don’t seek to put people out of work,” he said. “But we also think that you really cannot have the kind of labor market we want without price stability.”
So far, the job cuts have been mostly contained to a few industries, according to Andy Challenger, senior vice president at 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 large increases in layoffs in a handful of industries that seem to us to be potential bellwethers for the rest of the economy if things slow down significantly in the next few weeks and months.”
Pandemic darlings are cutting the most
A lot of recent layoffs have come from what have been hot, high-growth parts of the economy that did especially well during the pandemic.
For instance, the exercise equipment company Peloton took off when gyms closed. Similarly, Netflix’s popularity soared when people were stuck at home, binge-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 stepped down, and the company cut almost 3,000 jobs.
Similarly, the trading app Robinhood attracted millions of investors, who opened new accounts during the pandemic. People were flush with money from big stimulus checks from the federal government. Others saw bank balances balloon from reduced travel and eating at home. The stock market was hot and many wanted to trade.
Robinhood hired aggressively to keep up with this growth, growing six-fold, 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 scrutinizing the company’s headcount growth targets.
“Doing so enables us to be more resilient in hard times, and stronger during the good,” 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 car company’s salaried workforce by around 10%.
Several other tech companies, including Cameo, Carvana, and the payment business Bolt, have also reduced staff.
Perhaps no industry exemplifies the speculative exuberance of the last few years than crypto, which ballooned in size as the value of Bitcoin and other cryptocurrencies surged. But in June, during a sharp sell-off, a number of crypto companies scaled back.
Crypto.com reduced its staff by 5%, and Gemini, the cryptocurrency exchange run by Cameron and Tyler Winklevoss, reduced its headcount 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 its workers.
“We grew too quickly,” CEO Brian Armstrong told his employees. “Our employee costs are too high to effectively manage this uncertain market.”
As mortgage rates rise at the fastest pace in history, heads roll at home lenders
Another part of the economy that went gangbusters during the pandemic was 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. There has been a decline in applications for mortgages, as a result, and there also have been industry job cuts.
JPMorgan Chase is laying off hundreds of employees that work on home lending. The staffing decision “was a result of cyclical changes in the mortgage market,” according Shannon O’Reilly, a spokeswoman for the bank.
Earlier this month, the real estate broker Compass cut 450 employees, or about 10% of its staff, and Redfin reduced its overall headcount by 8%.
“A layoff is always an awful shock, especially when I’ve said that we’d go through heck to avoid one,” wrote Redfin CEO Glenn Kelman, in a memo to staff. “But mortgage rates increased faster than at any point in history.”