Companies protect their workforce from efforts to cool inflation, cutting profits in hopes of recovering faster at a later time.
All of the Fed’s aggressive measures this year to rein in inflation should lead to fewer hiring and spending by businesses. But there is no law that says larger, more profitable companies should cut back on spending if they don’t feel like it. The cuts shown in this quarter’s earnings reports from the biggest tech companies are from three tablespoons of ice cream to two.
If you are wondering why employment growth has been strong despite the warning signs in financial markets, the structural change in Silicon Valley This has happened since the early 2000s, with the dotcom bankruptcy being a big part of it.
Employment numbers this quarter from some of the biggest tech companies have been a surprise due to reports over the past few months of layoffs and hiring freezes in the sector. Alphabet Inc. , the parent company of The Googleadded 13,000 employees this quarter. meta pads Inc. , father Facebook3,800 were added. Amazon.com, after laying off 100,000 employees in the second quarter when its warehouses were overcrowded, returned to growth, adding 21,000 workers.
And that wasn’t a particularly strong quarter for the companies’ more well-known lines of business. Online advertising revenue has been slow due to general economic uncertainty, and e-commerce volumes remain sluggish as consumers shift their spending habits from goods to services.
Adding to this slowdown has been revenue headwinds from a rising dollar, and less progress in cost control than investors would like. The result: profit margins have been affected and the stock has fallen in value this year. To the extent that the Fed thinks the stock market slowdown is helping it in its mission, it helps. But if it is also determined to return the labor market to a better balance, it is not clear how much help they will get from the largest and most profitable technology companies.
While the alphabet Amazon emphasized that as they are working to control costs, the two companies will likely continue to add workers. Alphabet said headcount additions slowed by about half this quarter compared to the third quarter, but that still points to a reasonable amount of growth. Amazon said it has cut capital spending income Its e-commerce business this year is about a third of its initial plans. After continued investment in their flow and profitable Amazon Web Services The lines of business mean that the company’s spending budget will not be lower than it was in 2021. Meanwhile, Meta seems content to ignore the wishes of shareholders and continue investing billions of dollars in metaverse Vision.
While the biggest tech companies have fallen out of favor with investors, this is different from what we saw for the companies and industries that were the center of the storm in the recessions of the early 2000s and 2008. In the early 2000s, money Tech companies dried up and went bankrupt, causing a series of job losses and hard times for companies when they were still dependent on investors to fund their growing (but cash-burning) business. In 2008 there was a domino effect to reduce housing construction, falling home prices, job losses, foreclosures, and bankruptcies. In both recessions, companies laid off people not because they wanted to, but because they had to.
And while we saw some forced layoffs in Startups And cash-burning technology companies like Carvana Co. and Peloton Interactive Inc. , which is not realized in the largest technology companies. Consensus estimates are that Alphabet will earn more than $80 billion in operating profit in 2023. Does it make sense for their long-term prospects to lay off 5,000 or 10,000 workers in order to protect profit margins and appease shareholders in the short term? Would that be wise in an environment where there is scrutiny of the business practices of the most powerful and profitable tech companies? can say no. And if the biggest tech companies don’t do mass layoffs, that limits the broader economic fallout.
What this means is that, rather than slower business conditions increasing unemployment, the greater risk for investors is lower profit margins as companies slow or halt their spending plans without making deep cuts – a ‘complete job stagnation’ scenario. And then as demand returns, companies will find themselves staffed enough to meet that growth, and hopefully allow profit margins to bounce back quickly without all the hiring we’ve seen over the past couple of years.
So the Fed should not expect a rapid deterioration in the labor market. We are used to economic soft spots where workers bear the burden of adjustment. This time it was the profit margins that were affected.
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