Cuts at Amazon, Other Tech Companies Don’t Spell Recession Yet

Downturns in 2001 and 2007-09 were apt examples. The deflated internet and telecommunications bubble in the early 2000s and then the mortgage and housing crunch of the mid-2000s emanated outward, damaging financial companies, consumer spending and business investment. That ultimately led to economywide recessions and widespread layoffs.

Yet a close read of recent history is more reassuring. Some industry fires don’t spread. In 2015, a fracking bust took down the energy sector but the economic expansion went on to become the longest on record. 

The problems of some sectors, like in 2015, have thus far remained contained—though signs of broader vulnerability remain. Perhaps the biggest threat is the Federal Reserve’s ongoing interest rate increases, which touch nearly every household and business.

As in the 2000s, technology and housing are already wobbling. Layoff announcements by Amazon,

Microsoft Corp.

and other tech companies have dominated business airwaves. Employment in the information industry as a whole was unchanged at 3.1 million between July and January, with a small decline among software publishers. Total employment rose sharply in that period.

More cuts could be coming as tech executives trim costs in response to pressures on their bottom lines. Profits of tech companies in the S&P 500 in the fourth quarter were down 8.4% from a year earlier, the worst performance since 2009, according to Refinitiv, which tracks earnings and analysts’ estimates.

At the same time, higher interest rates engineered by the Federal Reserve to slow growth and push inflation down have already crippled home building and taken down home prices. Residential construction has dropped for seven straight quarters, according to the Commerce Department. The S&P CoreLogic Case-Shiller National Home Price Index was down 2.7% between June and December on a seasonally adjusted basis. 

Yet the latest readings of the job market suggest the broader U.S. economy is still growing at a healthy pace.

Over six months through January, payrolls in 72% of industries tracked by the Labor Department’s Bureau of Labor Statistics continued to expand. That was down from an exceptionally high 90% last March, but still well above an average of 62% over the past three decades. During the last four recessions, by contrast, contracting industries exceeded expanding industries by a ratio of as much as 10-to-one.

“Layoffs are making the news, but it’s not widespread,” said Joanie Bily, president of RemX, a staffing firm. Job cutting is “very focused right now on the tech sector and companies that benefited the most during the pandemic.”

The National Bureau of Economic Research, an academic group that determines when recessions begin and end, defines a recession as a significant decline in economic activity that is spread across the economy and lasts more than a few months. Thus, a slump in one or two sectors wouldn’t typically qualify.

Still, the dynamics of recession typically feature malaise in one sector triggering malaise in others. In 2007, falling home prices led to mortgage defaults, which led to bank losses, constrained bank lending and curtailed consumer spending. While job losses were especially steep in finance and home building, virtually every sector ended up contracting. In the early 2000s, a tech-sector boom led to aggressive investment and then retrenchment by companies in many industries.

The fracking bust of 2015 was different. Drillers overproduced, sending prices lower. The industry’s boom turned to bust as they cut back investment and chopped payrolls by about 50,000 over a two-year period.

While energy-producing regions suffered, many consumers benefited because gasoline prices fell. “A sharp and dramatic decline in investment by the oil sector was offset by the stimulus to consumers from lower oil prices,” said Lutz Kilian, a senior economic-policy adviser at the Federal Reserve Bank of Dallas. 

In recent years, households’ savings have been padded by federal Covid-19 relief payments, and businesses have kept hiring even in the face of slowing sales because of the need to fill depleted ranks. That has led to low unemployment, rising wages and robust consumer spending, providing critical support to the economy.

The tech sector is going through its own cycle. It boomed during the pandemic as people shifted shopping and entertainment online. Then as the economy emerged from the pandemic, many tech firms discovered they overhired. Amazon’s pullback is an example of that overreach going into reverse. Meanwhile, real estate is primed for more fallout as the Fed keeps pushing interest rates higher.

A bimonthly Census Bureau survey of 200,000 businesses in February found that managers in 16 of 19 industries believed conditions remained above average on net, though the share of businesses in those industries describing conditions as excellent or above average had receded since July. Managers in retailing, accommodation and travel described conditions as below average.

The profit picture presents a warning sign, however. Among 11 S&P 500 sectors tracked by Refinitiv, earnings declined in nine in the latest quarter compared with a year earlier. Only energy and industrials experienced earnings growth. Widespread profit downturns like that have been associated with recessions in the past. During the 2015 fracking bust, on the other hand, a majority of industries continued to experience profit growth even while energy profits tumbled. 

If a widening array of firms respond to declining profits by cutting employment, which then cripples consumer spending, that could cause a recession. Analysts tracked by Refinitiv expect continued profit declines in the first quarter and second quarter this year, with industries including consumer discretionary, financials, materials and healthcare suffering.

Another risk: The Fed has been on a campaign of interest-rate increases to slow economic growth and contain inflation, as it was before recessions in 2001 and 2007-09, but not in 2015. The effects of Fed tightening tend to seep into all parts of the economy. 

Analysts at Moody’s Investors Service, a credit-rating firm, find some evidence that a widening array of industries could experience challenges servicing debt in the next 12 to 18 months as interest rates rise and debt comes due. They have tagged six industries with a negative outlook over the next five years—including retail, autos, shipping, chemicals, mining and forestry. They viewed just one industry negatively a year ago. Hospitality, defense and airlines have positive outlooks, with seven other industries seen as stable. 

“Shifts in industry outlooks signal waning recovery and deteriorating credit fundamentals,” Moody’s reported. “Refinancing will be costlier and tougher to execute.”

Write to Jon Hilsenrath at [email protected]

Downturns in 2001 and 2007-09 were apt examples. The deflated internet and telecommunications bubble in the early 2000s and then the mortgage and housing crunch of the mid-2000s emanated outward, damaging financial companies, consumer spending and business investment. That ultimately led to economywide recessions and widespread layoffs.

Yet a close read of recent history is more reassuring. Some industry fires don’t spread. In 2015, a fracking bust took down the energy sector but the economic expansion went on to become the longest on record. 

The problems of some sectors, like in 2015, have thus far remained contained—though signs of broader vulnerability remain. Perhaps the biggest threat is the Federal Reserve’s ongoing interest rate increases, which touch nearly every household and business.

As in the 2000s, technology and housing are already wobbling. Layoff announcements by Amazon,

Microsoft Corp.

and other tech companies have dominated business airwaves. Employment in the information industry as a whole was unchanged at 3.1 million between July and January, with a small decline among software publishers. Total employment rose sharply in that period.

More cuts could be coming as tech executives trim costs in response to pressures on their bottom lines. Profits of tech companies in the S&P 500 in the fourth quarter were down 8.4% from a year earlier, the worst performance since 2009, according to Refinitiv, which tracks earnings and analysts’ estimates.

At the same time, higher interest rates engineered by the Federal Reserve to slow growth and push inflation down have already crippled home building and taken down home prices. Residential construction has dropped for seven straight quarters, according to the Commerce Department. The S&P CoreLogic Case-Shiller National Home Price Index was down 2.7% between June and December on a seasonally adjusted basis. 

Yet the latest readings of the job market suggest the broader U.S. economy is still growing at a healthy pace.

Over six months through January, payrolls in 72% of industries tracked by the Labor Department’s Bureau of Labor Statistics continued to expand. That was down from an exceptionally high 90% last March, but still well above an average of 62% over the past three decades. During the last four recessions, by contrast, contracting industries exceeded expanding industries by a ratio of as much as 10-to-one.

“Layoffs are making the news, but it’s not widespread,” said Joanie Bily, president of RemX, a staffing firm. Job cutting is “very focused right now on the tech sector and companies that benefited the most during the pandemic.”

The National Bureau of Economic Research, an academic group that determines when recessions begin and end, defines a recession as a significant decline in economic activity that is spread across the economy and lasts more than a few months. Thus, a slump in one or two sectors wouldn’t typically qualify.

Still, the dynamics of recession typically feature malaise in one sector triggering malaise in others. In 2007, falling home prices led to mortgage defaults, which led to bank losses, constrained bank lending and curtailed consumer spending. While job losses were especially steep in finance and home building, virtually every sector ended up contracting. In the early 2000s, a tech-sector boom led to aggressive investment and then retrenchment by companies in many industries.

The fracking bust of 2015 was different. Drillers overproduced, sending prices lower. The industry’s boom turned to bust as they cut back investment and chopped payrolls by about 50,000 over a two-year period.

While energy-producing regions suffered, many consumers benefited because gasoline prices fell. “A sharp and dramatic decline in investment by the oil sector was offset by the stimulus to consumers from lower oil prices,” said Lutz Kilian, a senior economic-policy adviser at the Federal Reserve Bank of Dallas. 

In recent years, households’ savings have been padded by federal Covid-19 relief payments, and businesses have kept hiring even in the face of slowing sales because of the need to fill depleted ranks. That has led to low unemployment, rising wages and robust consumer spending, providing critical support to the economy.

The tech sector is going through its own cycle. It boomed during the pandemic as people shifted shopping and entertainment online. Then as the economy emerged from the pandemic, many tech firms discovered they overhired. Amazon’s pullback is an example of that overreach going into reverse. Meanwhile, real estate is primed for more fallout as the Fed keeps pushing interest rates higher.

A bimonthly Census Bureau survey of 200,000 businesses in February found that managers in 16 of 19 industries believed conditions remained above average on net, though the share of businesses in those industries describing conditions as excellent or above average had receded since July. Managers in retailing, accommodation and travel described conditions as below average.

The profit picture presents a warning sign, however. Among 11 S&P 500 sectors tracked by Refinitiv, earnings declined in nine in the latest quarter compared with a year earlier. Only energy and industrials experienced earnings growth. Widespread profit downturns like that have been associated with recessions in the past. During the 2015 fracking bust, on the other hand, a majority of industries continued to experience profit growth even while energy profits tumbled. 

If a widening array of firms respond to declining profits by cutting employment, which then cripples consumer spending, that could cause a recession. Analysts tracked by Refinitiv expect continued profit declines in the first quarter and second quarter this year, with industries including consumer discretionary, financials, materials and healthcare suffering.

Another risk: The Fed has been on a campaign of interest-rate increases to slow economic growth and contain inflation, as it was before recessions in 2001 and 2007-09, but not in 2015. The effects of Fed tightening tend to seep into all parts of the economy. 

Analysts at Moody’s Investors Service, a credit-rating firm, find some evidence that a widening array of industries could experience challenges servicing debt in the next 12 to 18 months as interest rates rise and debt comes due. They have tagged six industries with a negative outlook over the next five years—including retail, autos, shipping, chemicals, mining and forestry. They viewed just one industry negatively a year ago. Hospitality, defense and airlines have positive outlooks, with seven other industries seen as stable. 

“Shifts in industry outlooks signal waning recovery and deteriorating credit fundamentals,” Moody’s reported. “Refinancing will be costlier and tougher to execute.”

Write to Jon Hilsenrath at [email protected]