The Daily - How Layoff News Is Hiding a Hot Job Market

Episode Date: December 12, 2022

 Companies like Meta and Twitter have said that they will be cutting jobs. Google and Amazon have announced that they are putting a freeze on any new hiring.Are tech layoffs a sign of things to come across other sectors? Is this the opening bell for the bad news on the economy that many have been bracing for?Guest: Jeanna Smialek, a correspondent covering the Federal Reserve and economy for The New York Times.Background reading: President Biden is celebrating a jobs engine that is running hot; Federal Reserve officials want to see more signs of slowing growth amid their campaign to tame inflation.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday.

From The New York Times, I'm Sabrina Tavernisi, and this is The Daily. American tech companies are slashing jobs dramatically, raising worries about a broader ripple effect. I spoke to my colleague Gina Smilak about what's going on in the job market and what it tells us about this very strange time in the U.S. economy. It's Monday, December 12th. Gina, hi. Hi. So you are our resident expert on the U.S. economy, and we are very, very happy to have you back on the show.

Hopefully you're happy to be here. I am happy to be here. Thank you for having me. Okay. So we here at The Daily have been noticing lots of news about layoffs in the tech sector. You know, companies like Meta and Twitter said they'd be cutting jobs. Google and Amazon have announced they're putting a freeze on any new hiring. So my first question for you is this. Are tech layoffs a sign of things to come? Like, are they the opening bell of the bad news we've all been bracing for in the economy? So in a word, I would say no.

Okay. The tech sector is, you know, clearly something worth watching, but it's a pretty unique part of our economy, and it's a very small one. What's unique about the tech sector? Like, why is it not really that representative? Well, first of all, I think it's important to think about how many people the sector actually employs. So those meta layoffs that you mentioned, they were big, but they were about 11,000 people. The Twitter layoffs were 3,750, give or take a few. In the economy, there are 153.5 million jobs. So we're talking about a very small portion of the economy. Okay, drop in bucket. Tech as a whole makes up about 2% of jobs in the economy. So very small relative to the rest of the American workforce. And tech moves in weird ways

in relation to stock markets. Weird how? Tech companies are very sensitive to what's happening in the economy and what is happening in markets. And this is actually pretty common sense. So people look for returns on their investments. And when they don't have a lot of good, safe alternatives to earn those returns, they tend to turn to tech companies,

which are often sort of predicated on this idea that they're going to make money down the road. So this is a good benefit for them most of the time in a normal, healthy economy, because people will actually give them financing more cheaply than they might otherwise, based on this belief that they're going to do well in the future, they're going to make big earnings in the future. Unfortunately, when things are less certain and when you see markets really fall off a cliff, in those moments, it becomes a lot more expensive for tech to finance those kinds of expansions. Why? You know, investors don't want to put their money at risk. They want short bets only. And in this cycle in particular, interest rates have gone up quite a

bit. So they have safe places where they can put their money and they don't have to use these speculative investments to really earn that return. And so what we've seen is it's become more expensive for tech companies to borrow. And that can really change the calculus when they're looking at whether they want to expand, whether they want to pursue a new project. And ultimately, all of that boils down to whether they want to hire people. So it's more expensive to do new projects and expand, and it's more expensive to hire, basically. And so that's why you see tech tending to be very responsive to sort of the business cycle. When things look uncertain and when rates rise unexpectedly, and especially when investments like stocks sort of become less attractive, you can really see these companies begin to pull back.

That makes sense. Basically, when times get tough, investors pull their money out of tech companies. Exactly. Gina, what about our own industry, media? I mean, I'm also seeing headlines there, lots of layoffs, right? Like, isn't that some sort of sign? Again, super tiny sector, not a big part of the broader economy, and very sensitive to the advertising cycle.

Advertising is one of those sort of extra things in a company's budget, where if they think that the economy might not be so solid next year, they're likely to pull back on. And so we have seen advertising spending down sharply, and that results in media layoffs. Not necessarily a canary in the coal mine. You know, it could be, but I think it's way too soon to say that it is. And you're saying we're pretty small. We're very small. We're very tiny in the sort of broader pie that is the American economy. Okay, good for that ego check.

I appreciate it. So the tech sector is unique. So is media. What is the broader job market like right now? So we are actually seeing continued strength in the broader economy. Sort of the big story is a very resilient job market that seemed to just be chugging through all of this uncertainty. Layoffs are extremely low. Job openings are extremely high. There's about 1.7 jobs open in the country for every unemployed worker. So just a very high level of job openings.

And unemployment is just hovering near a 50-year low. Wages are growing at the fastest pace in decades. Overall, just a very solid hiring sort of picture right now. Okay. So number one, that's really surprising. You know, this understanding that the economy is actually really hot right now. And number two, now that I know it is, what is the nature of its hotness? Like which industries are doing well? Like what's happening out there? So you see this strength across a bunch of different sectors in the economy.

But I think one that's important to spotlight because it's just so strong is leisure and hospitality. So these are the jobs that sort of do the services we interact with when we're on a trip. Think hotel clerks, restaurant servers, you know, everyone you interact with at the airport, basically. These jobs are just going gangbusters. This industry is still hiring very quickly, and it still has really solid wage growth, which is a sign that people are still competing for workers. You know, they want to hire and they're struggling to do so. And so they're offering to pay more to do that. So restaurants, hotels out there competing for workers.

Absolutely. So we're seeing that very strongly. And remind me, Gina, what portion of the U.S. labor force approximately is leisure and hospitality? Give me a minute. I need to do the math. Give me a minute. I need to do the math. It's 10.4% of the economy. Oh, wow. So it's a lot.

Yeah. So five times as big as the tech sector, basically. Some other industries are also doing really well that are a little bit more surprising. You know, construction is continuing to hire really rapidly. That's a bit of a surprise, a little bit of a head scratcher there, because as we all know, the housing market is really starting to pull back. But it seems like there's just so much construction already in that pipeline that people are still looking for workers where they can find them. Interesting, because there's a lot of pent-up demand there. Exactly, exactly. It's pent-up demand. Another place where we're seeing that is manufacturing continues to hire. Most economists think that will slow down, but it hasn't really sort of fallen off a cliff yet. So these are like car plants, and what are some examples of manufacturing?

So we actually know, based on the government data specifically, where these manufacturing workers are being added, and it's really across a range of different jobs. You know, we're seeing machinery manufacturers still hiring. We're seeing continued hiring in sort of motor vehicle production. So it does seem like it's kind of pretty much across the economy. We're still seeing pretty solid demand for these workers. And then we're seeing decent demand still for some high-skill jobs. So the information industry, which, you know, what is that?

What is that? industry, which, you know, what is that? It's an industry that includes a lot of sort of complicated, more sort of high education requirement kind of jobs. So think publishing industries, broadcasting, telecommunications, data processing. We're still seeing some, you know, increases in that sort of segment of the economy, which is, you know, again, given the headlines we've been seeing, somewhat of a surprise. Okay, so this all sounds really good, right? Like, the job market is roaring. So we're done. Podcast finished. Podcast not finished. Oh, no. Okay. Why? It's not that simple. You know, we all like having a hot labor market. It's great to have a hot labor market, but it is possible for the labor market to be too hot. We'll be right back. So, Gina, you just told us that the job market can sometimes actually be too hot.

So explain that. Right. So this all comes back to inflation, which, as listeners on the show know, is a real problem in America right now. The big I word. The big I word. Yeah. It's a problem around the world., is a real problem in America right now. The big I word. The big I word. Yeah. It's a problem around the world. It's a problem here. So we have had 7.7% inflation over the past year. It's very rapid compared to normal, which is around 2%. And while the job market wasn't the primary driver of inflation, with a job market this strong, it will be hard for inflation to come back down to that normal 2% level.

Why? There are kind of two big reasons for that. The first is wage growth. So when there are way more jobs open than there are available workers, companies pay more to hire. They try and lure people away from their competitors. And as they pay more, as their labor bills go up, they charge more to try and cover those increasing costs. And so, you know, inflation is price increases. And so this can help to perpetuate price increases. The second mechanism here is when you, as a worker, are earning more, when your job prospects are solid and you're really doing well in the labor market, you're likely to spend more. You know, and as we all

spend more, it's giving companies the wherewithal to keep charging more. And so this sort of two-part relationship plays out when a job market is hot like it is right now that can keep inflation elevated. So this is kind of a double whammy for the inflation problem. problem. And, you know, I cover the Federal Reserve. I spend all of my time thinking about what they're thinking about. And this is the number one thing they are thinking about right now. They are very aware of this and very concentrated on what comes next in the labor market. And Gina, going back to what you just mentioned before, spending, you know, people spending. Is that happening? What's happening with spending right now? What's really interesting is that spending had pulled back somewhat over sort of the late summer period. And it seems to be re-accelerating a little bit right now. October consumer spending just out

shows the biggest gain since June. We saw really good spending data in the sort of last personal consumption expenditures report. Strong and expected consumer spending. It was up roughly twice what it was expected to be. It's one of the very closely watched reports that just kind of tells us how the American consumer is doing. And it looks like right now the American consumer is doing pretty well. How is this holiday season shaping up? How does it compare to previous years? The holiday weekend is off to a multi-billion dollar bang.

And then I think we had that reinforced by some of the numbers we saw out of Black Friday. Retailers report nearly 200 million people flock to stores from Thanksgiving through Cyber Monday. That's 20 million more than a year ago. Black Friday online sales topped nine billion dollars for the first time. We hit a new record on spending. Wow. So more than last year. More than last year by a considerable margin. And so, you know, I think that we have seen the consumer be really resilient. Interesting. So where are people getting that money? Like, is this money from these jobs that they have and they're really confident about? Or is this something else?

So a lot of it is coming from these jobs. People are getting hired. They're getting raises something else? So a lot of it is coming from these jobs. People are getting hired. They're getting raises. They're working a lot of hours. And that is helping them try to keep up with this fast inflation. But the other thing is people are sitting on a lot of money from the pandemic.

You know, people got stuck at home. They got stimulus checks. And a lot of folks paid down their credit card debt. And so people are in good financial shape right now. Fed data shows that sort of across the board, we're sitting on about $1.7 trillion in extra savings compared to what we would have expected relative to before the pandemic. $1.3 trillion of that is in the top half of earners and about $350 billion. So a small amount, but still a sizable amount, is sitting with the bottom half of earners and about $350 billion. So a small amount, but still a sizable amount is sitting with the bottom half of earners who are much more likely to spend money out of

savings. Interesting. And like, that's not normal, right? Like this is kind of an odd effect of the pandemic. Yeah, this is not normal at all. This is a lot of savings. And we've really seen people consuming out of them. They're using this to sort of fuel their spending and keep up the consumption that they've gotten pretty used to over the last couple of years. And I think it ties back very much to the strong labor market story that we're telling. You know, people say very mean things about the economy when you ask them in surveys. They're not feeling good about it. They're not confident. They're not happy. But then when you ask them how they feel about their own job prospects, they often strike a much more optimistic tone.

And we're seeing in sort of the New York Fed survey, for example, which is one that I like to follow, we're seeing people feel pretty good about their future wage growth prospects. And so I think, you know, even if you think that the economy is not chugging along the way you would like to see, at the end of the day, if you personally are getting, you know, raises and your job is looking good and you feel like you could leave for a better job if you wanted to, you're going to feel pretty comfortable spending. So in the abstract, they're pretty sour about the economy. But in real life, when it comes to their own prospects in their own job, they're pretty happy. Yeah, I think that's where we are right now. We're in this moment that is pretty good for workers, but they're also seeing their purchasing power rapidly eroded by inflation. And this whole sort of constellation

of developments is very bad for the Fed, obviously. I think a good way to think about it is this is good in the short term for workers because they're seeing good opportunities and good wage growth, but it's potentially bad for them in the longer term because they're combating these very rapidly rising prices. And there are a lot of reasons to think that this economy is going to have to slow down in order for inflation to moderate. And that could be a very painful process for American employees. So in other words, there's this tension between, on the one hand, good job security that exists across the economy right now, and on the other, keeping prices low, getting inflation down. Like those two things are in conflict. There is definitely a tension. And I think we've kind of been in the rising action

phase of that tension all year long. And we're now about to hit sort of the climax of that tension. We're sort of on this precipice where things are really going to get decided. How this all plays out is really going to be determined in 2023. And what's going to happen, Gina? What's your crystal ball say? So nobody knows because the economy is always weird and hard to predict, but it is super weird and hard to predict right now. But I think that based on what we do know now, economists are kind of expecting two basic potential outcomes. I think there's a really bad scenario, which is sometimes referred to as the hard landing scenario. And I think, you know, when we talk about a bad scenario for the economy, the trends we're seeing now could potentially make it worse. In a hard landing, inflation doesn't come down as quickly as the Fed is hoping. You have a Fed that has to get even more aggressive in trying to slow down

the economy in order to wrangle those price increases. So it's raising rates, raising rates, raising rates. Right. So I think in this scenario, you get a Fed that gets into 2023, looks around, sees that the labor market is still just chugging along, consumer spending is chugging along, and there's so much momentum that it kind of needs to tap those brakes harder to get it to stop. Because inflation is still out of control. Exactly. Exactly. And I think in that scenario, the real risk is that you've got a Fed that sort of puts those brakes on at the same time as people start to run out of those savings buffers that we've been talking about. All of this hits the economy at the same time or over the same time period

because monetary policy takes a while to really play through the economy. And you could get a pretty painful recession where people lose a lot of jobs. And so there is a very potentially negative outcome that could still happen. But we're not going to know until, you know, a little bit into next year. And what's the good scenario? In the good scenario, inflation might come down, perhaps gradually, but pretty solidly, and the job market will cool down, but it won't crash. There are a couple of things about today's economy that make you think that that's possible. One, inflation is going to moderate for a bunch

of different reasons, from supply chain healing to sort of the return of car production that should help inflation come down. All those job openings we talked about earlier could give the labor market this nice room for adjustment where employers can just sort of stop hiring rather than laying all of their workers off. And maybe it's the case that consumers, because they have such good balance sheets already, you know, just kind of spend on their savings, stop spending, and inflation kind of fades in this very benign, easy way

that we haven't seen in the past. Like it's not an emergency, not really a recession even. Some would call it a soft landing. Okay. Okay, you economists. Right. So we have this soft landing,

this very optimistic scenario where you see a sort of gradual slowdown next year. Maybe people start to read these headlines about tech layoffs. And even though tech is just a little small part of the economy, they get a little bit less confident, start spending a little bit less. But nothing feels that terrible. So then Fed officials are kind of hoping people read the newspaper, read about the tech layoffs and get worried. Yeah, I think I think a little bit of worry could do this economy some good, possibly. Gina, thank you.

Thank you. We'll be right back. Here's what else you should know today. On Sunday, American officials announced that a Libyan intelligence operative was arrested by the FBI and is being extradited to the United States. He will face charges in the 1988 bombing of Pan Am Flight 103 over Lockerbie, Scotland, one of the deadliest terrorist attacks in American history. The arrest was the culmination of a decades-long effort by the Justice Department. In 2020, Attorney General William Barr accused Abu Ajila Mohammed Massoud of building the explosive device used in the bombing, which killed 270 people, 190 of them Americans. Massoud was being held at a Libyan

prison for unrelated crimes when the Justice Department announced charges against him. It is unclear how the U.S. government negotiated his extradition on Sunday. And. From Tranquility Base to Taurus-Littrow to the tranquil waters of the Pacific, the latest chapter of NASA's journey to the moon comes to a close. Orion, back on Earth. moon comes to a close. Orion, back on Earth. Shortly after noon Eastern time, NASA's Orion spacecraft landed in the Pacific Ocean, marking the successful completion of the agency's Artemis 1 mission. The end of the test flight, which had no crew, coincided with the 50th anniversary of

the landing of Apollo 17, the last time NASA's astronauts walked on the moon. NASA scientists were watching to see what would happen to the spacecraft's heat shield and if it could sustain re-entry to the Earth's atmosphere. The crew capsule, where astronauts will sit during future flights, descended to Earth at 24,500 miles per hour and was exposed to temperatures of up to 5,000 degrees Fahrenheit. The Artemis program is the successor to Apollo and aims to land astronauts on the moon as early as 2025.

Today's episode was produced by Mary Wilson and Michael Simon-Johnson, with help from Asita Chaturvedi, Rochelle Banja, and Diana Nguyen. It was edited by Mark George, contains original music by Dan Powell and Marian Lozano, and was engineered by Chris Wood. Our theme music is by Jim Brunberg and Ben Lansberg of Wonderly. That's it for The Daily. I'm Sabrina Tavernisi.

See you tomorrow.