eearlier this summer, Elon Musk emailed colleagues at his electric vehicle company Tesla that he had a “super bad feeling” about the economy and that he planned to cut Tesla staff by 10%, a plan he later carried out. the first in a steady stream of company layoff announcements that have accelerated this month.
The strange thing about Tesla boss Musk’s drastic decision is that his company is having perhaps its best year yet. The second quarter of 2022 was “one of the strongest quarters in our history,” Musk said on an earnings call in July, adding that Tesla has the potential to “break records” in the second half of the year. Profit was $2.3 billion, double last year, and earnings per share up significantly beat analysts’ forecasts.
Musk isn’t the only CEO to cut jobs based on a sense of doom and gloom, even as their companies thrive. Oracle made company-wide layoffs even as it reported that revenue rose 5% and that the company “is positioned to deliver stellar revenue growth over the next several quarters.” Microsoft laid off about 1,000 people and then reported in late July that profit rose 2%. Even Ford, which said in late July that its net income rose 19% and that consumers are buying products as fast as the company can make them, plans to cut thousands workers in the coming weeks.
The debate is over whether the US is in a recession continues, but if a recession hits the U.S. economy, CEOs, not consumers, should bear most of the blame after widespread layoffs, even as their companies perform well.
Read more: Why a recession is not inevitable
In some ways, the overall economy looks very strong. The U.S. economy added 528,000 jobs in July, the government said on Aug. 5, nearly double what analysts had expected. The unemployment rate fell to 3.5%, the lowest level since the start of the pandemic.
And consumers are still spending big: Retail spending in July was up 11.2% from a year earlier, according to Mastercard Spending Pulse, which measures in-store and online retail sales across all forms of payment. (It helped that gasoline prices, one of the factors pinching consumers’ wallets, fell for 50 straight days and are nearly $4 a gallon.) Companies including Starbucks, Uber, Airbnb, CVS and Starbucks said they are doing very well and that shoppers are coming in droves. “We don’t see any signs of slowing down yet,” Marriott CEO Anthony Capuano said on Aug. 2 after the company reported a 70 percent increase in revenue from last year.
Yes, there are some troubling economic indicators – the number of people applying for weekly unemployment benefits is rising in recent weeks, GDP growth has been negative for two quarters and interest rates have been rising. And it could be argued that companies’ strong earnings reports only reflect their performance in previous quarters. What’s more, some CEOs may look around and realize that because they’ve had to offer higher salaries amid a war for talent, their salary data has them worried; hourly earnings increased 5.2% over last year. Still, some of the recent job cuts and hiring freezes are unusual because they are preemptive, not reflective of companies already struggling.
“I believe only the paranoid survive,” said Spotify’s Daniel Eck. at the end of July, while announcing that the company will “proactively” reduce hiring by 25%. “And we’re preparing as if things could get worse, but it’s hard to be anything but optimistic given what I’m seeing right now.” The company added 5 million more users than expected last quarter and reported 23% revenue growth .
Changing attitudes towards job cuts
For most of the last century, companies didn’t lay off workers until they were in trouble and needed to cut costs, says Matthew Bidwell, a professor of management at the Wharton School at the University of Pennsylvania. Then, in the 1990s, even profitable companies began to decline. “They were comfortable with, ‘we’re making money, but we can make even more money,'” he says. This was around the time companies stopped investing so much money in workers, got rid of pension plans and other benefits for longtime employees, offered less training and generally viewed workers as interchangeable. These changes made it easier for employers to justify redundancies. In 1979, for example, less than 5% of Fortune 500 companies announced layoffs; during the Great Recession and its aftermath, 65% did.
Hiring and firing has become a way for CEOs to signal that they are strong, determined leaders who take bold action, Bidwell says—even though those decisions may go against what might be best for the company and – the big economy.
This style of leadership continues to prevail, even as hundreds of companies show that they are abandoning this type of shareholder capitalism in favor of stakeholder capitalism, an approach whereby companies consider the interests of workers, the environment and local communities in their decision-making process. But even companies that preach stakeholder capitalism don’t seem to be keeping his promises. Some of the companies that recently announced layoffs said they expect their business to continue to boom this year, raising the question of how they will continue to grow with fewer staff.
After Microsoft made layoffs in July, the company reported that revenue rose 2% and that it expects growth to accelerate. Amy Hood, Microsoft’s chief financial officer, told analysts on July 26, “We continue to expect double-digit growth in revenue and operating income” through the end of the year.
Unity Software, meanwhile, laid off 200 people in June, weeks after reporting a 36% year-over-year revenue increase and after CEO John S. Riccittiello said on an earnings call that Unity “will maintain and sustainably grow revenue at or above 30% per annum over the long term.’
Niantic, the privately held company that makes Pokemon GO and other games, said in June it would lay off 9% of its staff to prepare for “economic storms that may lie ahead,” according to Executive Director John Hanke. That same month, Pokemon GO reportedly surpassed $6 billion in revenue, one of the few games to pass that mark.
Cuts like these could play a role in how the economy is perceived in the medium to long term, which could have knock-on effects elsewhere in the economy. These cuts help dampen consumer sentiment about the economy, which itself could contribute to a recession. American households may cut spending in anticipation of bad times even if their finances are doing well, and laid-off workers will be cautious until they find new jobs.
Retail giant Walmart, considered the leader of the US economy, recently said its customers have already cut back on spending on non-essential, high-margin items such as clothing, leading the company to reduce your profit prospect and laid off hundreds of corporate employees. The movement raised concerns for the health of the American consumer and caused the shares of its competitors to fall. Meanwhile, another retail giant, Amazon, cut staff by approx 100,000 last quarter.
The long-term effect of layoffs
Research shows that layoffs are almost always bad for a company, says Sandra J. Sucher, professor of management practices at Harvard Business School. Workers who are not laid off will start looking for another job because they feel uneasy about their employer’s prospects. Those who are laid off, especially in technology, will find jobs with competitors and help them innovate; Recently fired Tesla employees have gone to competitors such as Rivian, Apple, Amazon and Lucid Motors, according to the news site Electrek. And general layoffs that try to reach a target percentage—say, 10 percent of staff—often end up purging people who play vital roles in the company, such as those with unique relationships with customers or suppliers. A 1% reduction in the workforce can lead to a 31% increase in voluntary turnover, according to research by researchers from the University of Wisconsin-Madison and the University of South Carolina. Another study, conducted by researchers at Stockholm University and the University of Canterbury, found that after a layoff, company survivors experienced a 41 percent drop in job satisfaction.
“The fact that these turn out to be self-defeating decisions makes this a particularly bad strategy,” Sucher says.
Moreover, even well-qualified laid-off workers can have problems once they lose their jobs; a study of workers who were laid off during an economic boom found that only 41% found a job at equal or higher pay a year later. The rest found lower paying jobs or left the workforce. When this happens to thousands of workers, there is a ripple effect in the economy where even employed workers are laid off to adjust to their new reality.
The layoffs were a sign of bad management, that you’re a CEO who doesn’t really know what’s going on with your company and can’t predict change, Sucher says. But that valuation has faded in favor of the idea that a sign of mismanagement is a falling share price. That’s why these layoffs in the face of strong earnings aren’t just limited to that weird period of 2022 when nobody seems to know what’s going to happen in the economy. The Washington Post found in December 2020 that 45 of the 50 most valuable publicly traded companies made a profit between April and September 2020, and also that on at least 27 out of 50 completed cuts over the same time period.
Many of these companies soon realized their mistake and rushed to add workers as consumer demand boomed. They couldn’t fill some positions fast enough, which ultimately hurt their business. The pattern seems to be repeating itself again. Marriott, for example, laid off thousands of workers at the start of the pandemic and cut its corporate staff by 17%. Then, in September, the company said it was in “scramble for talent” as it tried to hire 10,000 new workers.
The contradictory behavior of business leaders makes it even more difficult to gauge where the economy is headed. But with each layoff and CEO forecast of bleak conditions ahead of growth, the possibility of economic storms ahead grows.
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