Today, Explained - Why are businesses acting like there’s a recession?

Episode Date: January 27, 2023

Wealthy companies like Google and Microsoft are announcing unprecedented layoffs — all while the economy is trending in the right direction. Vox’s Emily Stewart explains. This episode was produced by Miles Bryan, edited by Matt Collette, fact-checked by Laura Bullard, engineered by Paul Robert Mounsey, and hosted by Sean Rameswaram. Transcript at vox.com/todayexplained   Support Today, Explained by making a financial contribution to Vox! bit.ly/givepodcasts Learn more about your ad choices. Visit podcastchoices.com/adchoices

There's this seemingly contradictory phenomena occurring in the United States right now. The economy appears to be heading in the right direction, right? This week, we learned the economy grew 2.9% in the fourth quarter of 2022. Inflation is easing. We saw over 200,000 new positions for people open up in December alone. But at the same time, some of the richest companies in the history of our planet are laying people off. Microsoft, 10,000 people cut. Google, 12,000 people cut. Amazon, 18,000 people cut. These aren't jobs. These are people. Why are these behemoth businesses acting like we are in a recession when the economy is looking pretty okay?

That is coming up on Today Explained. groceries delivered across the GTA from Real Canadian Superstore with PC Express. Shop online for super prices and super savings. Try it today and get up to $75 in PC Optimum Points. Visit superstore.ca to get started. Today Explained is the podcast. Emily Stewart is our guest. Vox is where she writes about the economy. So she seemed like the right person to ask why tens of thousands of people are getting laid off by some of the wealthiest companies in the history of humanity when it seems like the economy is heading in the right direction. So we asked her. Yes, there are a lot of high profile layoffs, but these are layoffs that make headlines and that are prominent on Twitter. And they are not actually a giant part of the labor force. These are relatively quite small compared to all of the workers in the United States of America.

So why are the richest companies laying people off if the economy's about to maybe turn the corner? Well, I think you kind of need to break it down by sector, by company. And to be clear here, there isn't a clear answer on why each company is doing this. And each company has their own reasons, right? So I think if you can look at tech, there are a combination of reasons. First of all, technology grew a lot in the pandemic. And some of those companies feel like they've overhired. I think here,

one smaller company, but bigger name is Peloton, right? So early on the pandemic, Peloton thinks they are going to really, really grow. Everybody's going to work out from home forever. For a software engineer, this is where your code can go farther. They hire a bunch of people. For a mechanical engineer, this is a place for the thing they wouldn't let you try at the last place. They really believed this story turns out to be wrong. Hey, are you all right? Turns out basically people are going to buy one Peloton bike, not seven Peloton bikes. So that's a situation where Peloton maybe overhires.

I mean, I almost get it with Peloton because that seemed like a fad. But Google's been around for 25 years. They've got like a one point three trillion dollar market cap. And this company, for the first time in its history, is having massive layoffs. What's up there? So I think you guys had my colleague Peter Kafka on to talk about this recently, right? Facebook and Google and Amazon said, oh, we're growing like gangbusters. The pandemic, frankly, is good for us. It accelerates trends that we're well positioned to take advantage of. We're going to spend money. We're going to hire lots of people. Wall Street said, great, that all sounds good.

And then, as happens often, Wall Street changed its mind and said, no, we don't like that. And one of the issues there is that tech has just been this giant growth story for years and years. The Googles, the Metas, the Amazons. And at some point, they can't keep growing like that. They've kind of become real regular companies like a finance company or any company that just kind of exists, a Walmart, whatever. You also have to remember that for years, interest rates were near zero. So it was really easy to borrow money. It was really cheap to borrow money to spend money. That is no longer the case. Interest rates are going up.

Some people I've talked to have said, you know, this is to a certain extent a reset of some of these companies looking at their headcounts and saying, do we need all of these people? Do we want all of these people to be here? Is this really what's going to help us? And, you know, there is also a question here of shareholder primacy, right? We live in a world where companies ultimately answer to their shareholders, want to make them money. And a way that they think that they can do that is by spending less money on workers. When Salesforce lays off 8,000 people or 10%

of its staff and the stock rockets higher, you have the blueprint for a tech turnaround. So this might sort of just be about optics. Let's make it look like we're being a little more conservative with our budgets and maybe our stock prices will turn around. I mean, they might need to be a little bit more conservative. Some of these companies have had some rough earnings. Meta had some really bad earnings. And it is a way to save money. Now, is this a way to maybe grow your company in a way that you ultimately need in two, five years from now? Maybe not. But this is at least for some companies think the right thing to do now is what they will

say. One thing a lot of these tech companies have in common, the Googles, the Twitters, the Facebook is how much they rely on advertising for their bottom lines. And of course, they also share that in common with media. And we're seeing media layoffs as well. Is that the through line here between media and tech layoffs? That's at least part of it. Media is an ad dependent business. And now a lot of advertisers are worried that a recession is on the horizon. So they are paring back their spending, including on advertising. So that hits a lot of places, including in media companies, including, unfortunately, our media company, which recently did a round of layoffs. Vox Media announcing in a memo to staff that it

will cut 7% of its workforce. That's according to multiple reports. What percentage of the overall workforce do these recent layoffs amount to? Is it big? Is it small? It's really, really tiny. Really small. A lot of this is getting a lot of outsized attention. Obviously, it is bad for people to lose their jobs. It is sad. It is awful, full stop.

But this is really small. For some perspective here, Meta laid off 11,000 people. Goldman Sachs in finance laid off 3,200. There are about 165 million people in the workforce. So it's nothing. It's a drop in the bucket. I mean, again, it's a big deal for the people who lost their jobs, obviously. And it's also really scary if you do work in media, in tech, in finance, thinking even if within a Facebook or a Google, maybe they laid off one in 10 workers. It's scary, the idea that you could be one in 10. But in the broad, broad scheme of things, this really does not add up to much.

It sounds like what you're saying is we're hearing about these layoffs a lot more because they're at some of the biggest tech companies and media companies in the world. add up to much. It sounds like what you're saying is we're hearing about these layoffs a lot more because they're at some of the biggest tech companies and media companies in the world. Tech and media get a lot of attention. Are we seeing layoffs in the broader workforce worth noting? We are not seeing elevated levels of layoffs in the broader workforce. If you take a look at jobless claims week to week. All right. Well, let's start out with what's going on with initial jobless claims.

They're pretty consistent and they're lower than they were pre-pandemic. 186,000. 186,000. That is a new cycle low. We kind of don't think about a lot of workers who maybe don't have a platform on Twitter, right? If somebody in construction gets laid off or somebody in leisure and hospitality, they maybe don't have a blue check mark, right? Those people are not being laid off right now, but those people are doing pretty well

compared to especially how they've done in previous years. This sounds like a real contrast to say the last time we had a serious economic downturn, not counting the pandemic, the Great Recession, when construction work, for example, was the hardest hit. And also in the pandemic, you know, who lost their jobs? I went to work from home. You went to work from home. Who lost their jobs? Everybody at restaurants, everybody at hotels, everybody who had these in-person jobs who call their jobs. There's a growing awareness from people in the higher paid, higher

educated professions that they aren't kind of winning as much as they used to. And it's not really conscious. But I think that there is some level of awareness of that. You know, one person I spoke to for a story I did on this recently said, listen, like, there are people who maybe are used to making, you know, like a white collar worker who is used to making 50% more than their cousin and suddenly they're making 30% more. And maybe that feels a little bit weird that it's like, wait, I got this college education and I moved off to the big city. Why is this not happening? Or, you know, feeling like when you go to a restaurant, everything's more expensive and not putting two and two together, that part of the reason maybe things are a little bit more expensive is because

the person serving you is making a little bit more money. Do you think this inversion in how the world works will last? No, I think to the extent the economy remains good and things remain on a relatively solid trajectory, you can see a world that for at least a while, you know, blue collar workers do get to hold on to some of this power. Some businesses don't want to lay people off. You know, a lot of businesses remember how many people they laid off in March and April of 2020 and how hard it was to hire people back. And a lot of economists will tell you they think there's some stickiness because businesses don't want to struggle to hire workers back. At the same time, if there is a recession, it's really unlikely that it's going to be wildly different than the

past several recessions. And if there is a really broad economic slowdown, it's going to hit the people it always hits, which are lower income and blue collar workers. Google and who knows, the Washington Post might get. Do you think that will end up having some impact on people's perception of the economy right now or even how other companies might conduct their affairs, maybe conduct their layoffs? I mean, it absolutely has an effect. I had talked to someone last week who said they had seen a story that I'd written about the white collar recession not really being reflective of the broader economy and said he'd showed it to his boss as proof that we're not in a huge recession. And he works in real estate, right? And his boss has been like,

that's it, this is the end of times. So I think the economy has felt icky, for lack of a better word, for a while. And if enough people feel bad enough, if enough businesses say, well, time to start laying people off because something bad is going to happen, if enough consumers start saying, well, got to bend down the hatches, I can't spend money, then a recession can become a self-fulfilling prophecy. So the

outside discourse around tech and media does matter. I think it's also important to say that hopefully next time there is a recession, there will be eventually. We pay attention to the people who don't have the biggest platforms. Those layouts are important as well, just because you don't work at Google. A brief break so we can pay the bills, and then I'll ask Emily about eggs.

It's Today Explained. Support for Today Explained comes from Ramp. Ramp is the corporate card and spend management software designed to help you save time and put money back in your pocket. Ramp says they give finance teams unprecedented control and insight into company spend. With Ramp, you're able to issue cards to every employee with limits and restrictions and automate expense reporting so you can stop wasting time at the end of every month. And now you can get $250 when you join Ramp.

You can go to ramp.com slash explained, ramp.com slash explained, r-a-m-p.com slash explained. Cards issued by Sutton Bank, member FDIC, terms and conditions apply. Bye. matter your team, your favorite player, or your style. There's something every NBA fan will love about BetMGM. Download the app today and discover why BetMGM is your basketball home for the season. Raise your game to the next level this year with BetMGM, a sportsbook worth a slam dunk, and authorized gaming partner of the NBA. BetMGM.com for terms and conditions. Must be 19 years of age or older to wager ontario only please play responsibly if you have any questions or concerns about your gambling or someone close to you please contact connex ontario at 1-866-531-2600 to speak to an advisor free of

charge betmgm operates pursuant to an operating agreement with iGaming Ontario. Hey, are you all right? Today Explained, we're back still with Emily Stewart, who told us in the first half of the show that, yes, there are major layoffs happening in tech and also in media, but that while they may be sucking all the air out of the room, they do not necessarily have implications for the wider economy. But Emily, you did use the R word a few times in the first half of the show. So let's talk about the wider economy. What's going on? Are things getting better? It feels

like things are getting better. Are they actually getting better? So inflation is getting better. It is slowing down. In December, the consumer prices rose by 6.5% from a year earlier. That's slower than it was in November. It really is getting a little bit better. So what we're seeing now is for the sixth month in a row, prices have cooled. So that is good news.

We've seen gas prices, which are an important part of inflation, also a thing that exists on giant signs in people's daily lives. Gas prices have come down as well. How low will they go? Plummeting pump prices below $3 at this Atlanta area gas station Thursday. And so there is kind of a growing sense that we might be in store for a quote unquote soft landing, meaning the economy cools off without pushing us into a recession. With the enormous caveat that nobody here can predict the future. We do not know what was going to happen. So generally, things are getting better.

But let's talk about eggs, Emily. What about the eggs? It seems like the eggs are getting worse. So egg prices are getting worse. Egg prices are higher. If you have gone to the grocery store recently, you've probably noticed. According to new data from the Consumer Price Index, egg prices in December rose 60% from a year earlier. Eggs have been part of the inflation story for a while. During the pandemic, it became more expensive to feed chickens that lay eggs because they eat grains, right, and soy. The packaging became more expensive. There's also, you know, a movement to be, not to be flippier, but to be nicer to the chickens, right?

It's a little bit more expensive if you don't put the chicken in a terrible cage. More recently, the story on egg prices has been that the bird flu. Basically, the chickens are sick. And when the chickens at a farm get sick, they have to depopulate the farm, which I think we can infer what that means. Basically, that means goodbye to all of the chickens. Very sad. And then it takes six months to repopulate the chicken farms. And so there are not there are not enough eggs.

OK, so the chicken thing is more of an exception. But what about jobs more broadly? There's been pretty steady job growth throughout the Biden administration. Are we still growing in that arena? Yeah, so job growth has slowed down, but it's still strong. You know, wage growth has slowed down. I think this is when the Federal Reserve is keeping a close eye on here, because they would like job growth maybe to slow down a little bit more. But we will be finding out on February 3rd, the next jobs report, exactly what's going on. But overall, this sounds like a positive picture. So if the picture is positive, why do things still feel kind of bad? I think the headline here continues to be

inflation makes everybody feel bad and weird and annoyed. Even if, yes, inflation is slowing down and sure the price of gas is slowing down, like the restaurant down the corner that increased the price of your meal that you always order or whatever wine you order, like those prices are not coming down. They're still more expensive. Some prices are still going up. So nobody likes inflation.

It's annoying, especially if your paycheck is not going up with it. I do think it's important to underline here also economic data has really kind of been all over the place for a while. Consumer spending had remained strong for quite some time despite inflation. That's starting to soften a little bit. Retail sales fell in December, which is notable because that's obviously the holiday shopping season. People were eating out less. They were spending less money on eating out. They were buying less cars. They were buying less furniture. The Federal Reserve has also been hiking interest rates since March. So that's almost a year now. And that affects a ton of things.

That affects the housing market. So if you need to get a mortgage, it's going to be more expensive. It affects credit card interest rates and how much it costs to borrow. So, you know, the stock market, obviously, in 2022 was pretty rocky. The S&P 500 is up this year. So that is good for stock investors, but also the market's really keeping a close eye on what the Fed does. The Dow Jones started the day up, but saw a sharp drop off at 2 p.m.

The Federal Reserve made its announcement that we were all anticipating it is raising interest rates by 75 basis points. And is the Fed going to keep raising rates? Are they going to quit it? They're going to keep at it, at least for a while. You know, I think Wall Street would hope that they will at least slow down and eventually stop this year. A lot of economists, especially progressive economists,

also would like to see that happen as well. For right now, the Fed says they're not going to stop. They might slow down a little bit. The Wall Street Journal also reported that there is a chance that they might pause maybe in the spring. But I don't think interest rate hikes are over. How come? Why keep it up? A lot of it is inflation is still happening. And the Fed really wants to get that under control. And their main tool to do that is interest rate hikes.

They feel like inflation did get out of hand. If you think back to prior to March 2022, there was a lot of theorizing that inflation was going to be transitory, that it would go away on its own. And there are a lot of economists and lawmakers and policymakers who feel that the Fed was too slow on starting to raise interest rates. And so now they're trying to catch up. So it seems like they're going to keep at it. You know, I think the thing that we don't talk about openly as the Fed increases interest rates is that the big tradeoff they're sort of seeking here is softness in the job market. And so what that means is a lot of the time they want people to not see their wages go up. And, you know, even more bluntly, they want people to lose their jobs.

Do we know where this ends, Emily? Is there an endgame here for the Fed for all this talk about a possible recession? So, you know, what the Fed wants is a 2% inflation over the long term. So, you know, if you think that we are at 6.5% right now, we are way off. That being said, you know, I've talked to economists who say that 2% number is made up, right? Like, no, it's not in the Constitution that inflation has to be 2%. There is a world where the Fed could say, hey, maybe we're okay with 3%, 4% for a while, especially if that means people will not lose their jobs. Will they do that? We don't know,

but they could. And the Fed is willing to risk a recession in theory to get that number down, to get it from six to four or three or two. That hasn't changed. No. I mean, the Fed, you know, everybody here, I don't think the Fed wants recession. Jay Powell, Fed chair, does not want a recession, obviously. But they really, really want to get inflation under control. And the way that they do it is by risking a recession. I mean, that being said, we could see a soft landing. We did see a soft landing in the 1990s. It's not impossible. But we really don't know. And I think it's also important to emphasize here, and this, again,

is a consistent story. What happens next in the economy is not just whatever the Fed says. There is still a war in Ukraine. COVID still exists. All of that kind of stuff. Who knows, right? Like the past three years have been wild and everything's been unprecedented. There could be something else to get through a wrench into things. So it isn't just the Fed that's going to decide this. Where does this leave the average American worker or someone around the world listening to this right now? I mean, between worrying about your job, worrying about recession, worrying about inflation,

worrying about eggs, or maybe even worrying less, what do you tell your friends when they ask you, Emily? What's the way to be? So I'm not the most optimistic person, full stop, about the economy. And I do not know what will happen next. But I don't feel that terrible. If I think back to March 2020, when it was like, is this the next Great Depression? Am I going to die of hunger or of pandemic? Did you think that? Did you think, am I going to die of hunger?

I don't know. I was pretty scared for a while. I was like pretty doomsday. I was wondering if I was going to die of not having toilet paper. Okay, well, that wasn't a problem in Flatbush. Inflation is coming down. The job market is strong. I think there is something to be said

that people who don't usually win in the job market are winning a little bit now. And that's good, right? Like people who have not been able to quit jobs, who have not been able to jump to higher paying jobs have. And that is positive. And yes, obviously, the prospect of a potential layoff is scary. But the job market isn't awful. A tech worker, you know, who maybe got laid off,

obviously that is upsetting, that is bad. They may not be able to be as choosy in finding their next job, but if you're a software engineer, the job market is still pretty good for you. So things are not great, but they haven't been super great for a while, but they're not nearly as terrible as a lot of the headlines would lead you to believe. Emily Stewart, Vox, she didn't pick the music, so don't blame her. Miles Bryan, Vox, he did pick the music as the producer of this episode. Tweet your thoughts to Miles underscore underscore Brian. That's Brian with a Y. Matthew Collette edited. Laura Bullard fact-checked. Paul Robert Mounsey mixed and mastered. Special thanks to Dave Colon in New York City. Treat your workers not so, well, you know. I'm Sean Ramos-Furham. It's Today Explained. Thank you.