Looking into Layoffs

Companies don't like to announce large layoffs during the holidays. Now that the holidays have passed, it feels like open season.

Salesforce -- a company with a $150 billion market cap, among the largest in the world -- announced they were laying off 10% of their employee base this week.

They won't be the last.

Salesforce had 49,000 employees in January 2020. They have 80,000 employees today.

Many companies, particularly well known technology companies, have an employee base that expanded in a similar fashion. 

It's been a poorly kept secret that many companies over hired during 2020/2021 thinking the sales growth (and rising stock prices) would last in perpetuity. The "digital revolution" (where everything happens online) is an obvious secular trend but the foundation certainly has some cracks.

FedEx elaborated on this during an investor call last month. FedEx's CEO had this to say:

"Let me talk about the macro environment. The main macro issue in the United States is the e-commerce reset. Prior to the pandemic, e-commerce represented about 16% of retail sales. During the pandemic, it peaked at about 22%. And ever since, its kind of been going down." 

Shopify, arguably Amazon's largest competitor for online sales, confirmed this same thing last July when they laid off 10% of their staff as growth stalled.

Shopify shared the below chart in the layoff announcement, which shows e-commerce adoption in the United States. Prior the pandemic, e-commerce growth had been extremely consistent. During the pandemic, growth went vertical. Two years later, growth simply reverted back to the previous trendline. 

Brad Gerstner - a well known Silicon Valley investor - wrote an open letter to Facebook last fall urging them to make material changes, particularly around headcount. In his words: 

"At Meta, the number of employees is up over 3x from 25k to 85k employees in just the last four years! After all, why not hire more people and invest in more things when the cost of capital was near zero and growth seemed unlimited?

Today, the cost of capital has radically changed, and so has Meta’s growth rate. It is a poorly kept secret in Silicon Valley that companies ranging from Google to Meta to Twitter to Uber could achieve similar levels of revenue with far fewer people. I would take it a step further and argue that these incredible companies would run even better and more efficiently without the layers and lethargy that comes with this extreme rate of employee expansion."

Another tech juggernaut, Google, saw headcount increase more than 50% since 2020, from 123,000 employees to 187,000.

Sadly, management let these businesses become extremely bloated and it seems likely employees will be the ones paying the price.

All of this brings us back to a conversation we had many times in 2020. The economy is not the stock market and vice versa.

The layoffs that already happened and ones likely to come will be headlines, but there exact impact on the broader economy is unclear. Many will likely assume layoffs are a negative for investors as the economic picture darkens, but that may not be the case.

Goldman Sachs put out a research note that provided some context around the layoffs observed through November. 

The layoffs are primarily concentrated in technology companies. In Goldman's report, they noted in an extreme scenario where every single worker in internet publishing, broadcasting and web search were all laid off tomorrow, the unemployment rate would rise by less than 0.3%.

Despite technology's dominance in the stock market (technology represents ~25% of the S&P 500), the overall workforce in technology is roughly 2%, according to data from ADP.

One argument for technology companies has always been they tend to be more efficient. They don't require as many employees as a company like John Deere; a company that needs a large labor force to build large equipment. That's one reason the impact of these layoffs may not reverberate throughout the economy. 

According to data from Layoffs.fyi, a website that tracks layoffs in media reports and company releases, estimates show 150,000 tech workers were laid off in full year 2022. Yet, the unemployment rate in the U.S. fell from 3.9% to 3.5% last year.

Laid-off tech workers are finding new jobs quickly. Roughly 80% of workers recently hired after a tech-company layoff or termination landed a new job within three months, per ZipRecruiter data. 

This is happening because the broader labor market outside of technology remains resilient. 10.5 million jobs remain open in the United States. This is down from the peak in March 2022 but still near record highs over the past decade.

We don't know what will happen with the economy in 2023. The probability of a recession is a consensus view, but that doesn't mean it can be predicted with certainty. Even if you had a crystal ball that gave you the economic news today for 12 months from now, it likely wouldn't help you predict where the stocks market goes.

There’s a case to be made a slowing economy (which layoffs would indicate) coinciding with slowing inflation could be the best outcome of all for markets. 

Layoff announcements are likely to persist. The institutional imperative is hard to resist, which is to say, "if the company next door is doing something then I should do it too."

The good news is the problem is mostly isolated to technology companies who forecasted poorly during the pandemic. And those impacted are finding new opportunities in short order.

The headlines look bad, but under the surface, it may be better than you think.