In a letter to staff on Wednesday, Salesforce, the US software company, announced it was cutting 10% of its workforce. The cut corresponds to close to 8,000 jobs. Salesforce stock rose 3% on the news. It had halved during a torrid 2022.
The news has cast a further dark cloud over expectations in the tech sector, which has seen plenty of layoffs recently. Meta was one of the earlier, and most high profile, axing 11,000 employees in November. But Twitter, Stripe, Amazon and Doordash have also relieved thousands of employees over the past couple months.
Why this is not that big of a deal
While the news is concerning for technology companies – and employees – it remains important to retain perspective when assessing the economy as a whole.
The tech sector is notoriously volatile and sensitive to interest rates. With many companies failing to return a profit, instead investors value these companies by discounting projected cash flow in future years back to the present. Hence, the interest rate at which these cash flows are discounted is of vital importance.
Therefore with interest rates rising quicker than Harry Kane’s World Cup penalty against France, tech stocks have felt the pain. From 0% to north of 4% in less than a year, and with the Federal Reserve maintaining that more interest rate hikes are imminent as it fights to curtail inflation, valuations have cratered.
A look at the Nasdaq, which is the stock index more heavily geared towards tech stocks, reveals the scale of the damage in the tech sector. It fell 33% last year, its sharpest decline since it fell 42% in 2008.
Tech sector is small, labour market healthy overall
But tech comprises only about 2% of the US economy. Another way to put it is this: while Salesforce laying off 8,000 employees sounds terrible, there are over 150 million employees in the United States alone.
The labour market overall remains stout. So much so, in fact, that is nearly a problem – in order for inflation to be reined in, there simply must be a softening in the jobs market. Tech, as we said, is extra sensitive to interest rates, but this is not as extreme in other sectors.
Yesterday, US job numbers showed job openings fell less than expected, further highlighting how tight the overall market remains. “The labour markets are still too darn hot for policymakers” said Chirstopher Rupkey, chief economist at FWDBONDS in an interview with Reuters. “Fed officials won’t be confident their monetary tightening is working until hiring demand begins to slow”.
The report also revealed that there are 1.74 job openings for every unemployed person – not exactly a picture of intense distress.
What is next?
Eyes continue to be trained on the Federal Reserve, who last month stated that interest rates could continue to rise up to 5.1%. With a tight labour market and demand persistent, it appears that this number simply has to be hit.
The unfortunate reality is that if inflation is to be reined in to moderate levels – and the Fed is determined to pull it back down to the 2% target – then some of the pain I the tech labour market must be distributed out around the economy.
Thus far, it is just the high beta tech sector that has begun to lay off employees.
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