April 10, 2023
Despite recurring headlines about layoffs at technology companies, Vanguard analysts expect employment in the sector to soon stabilize and see limited danger of it spilling over into the broader economy. The situation is not likely to dissuade Federal Reserve policymakers nor preclude Vanguard’s base-case scenario of a shallow recession later this year.
Comparisons have been made to 2001, with the start of massive tech layoffs driven by the year-earlier bursting of the dot-com bubble, or to late 2007, when initial layoffs in the financial services industry eventually drove the unemployment rate to 10% during the Great Recession.
But that level of unemployment is unlikely in the immediate future, either in the tech sector or in general, Vanguard economist Adam Schickling said: “Our projections are that the head count for the tech sector will decline but remain above 2019 levels. Outside of this sector, the demand for workers remains elevated and demographic factors suggest a minimal growth in labor supply, suggesting the next recession will accompany a rather small increase in job losses.”
For the tech sector, two factors explain why the headlines might be painting a more dismal picture than it seems: the level of hiring that preceded the layoffs and how rapidly other industries are absorbing the newly unemployed.
“Hiring in the tech sector was already robust before COVID hit,” Schickling said. “During lockdown, there were layoffs initially, but then there was a rapid acceleration in employment—a result of the drastic shift in consumer behavior and firms heavily investing in technologies to facilitate remote work.
“We were all home during lockdown, spending a lot more money on technology services and computer hardware and spending more time online. Companies aggressively hired to meet demand. But when the economy reopened, most people went back to their pre-COVID behavior. Consumers realized they didn’t need to have five streaming services or buy new electronics.”
Notes: These head counts are for representative industries in the tech sector: web search portals, computer infrastructure providers, data processing, web hosting, computer systems designs, and related services. The numbers include international workers working in the United States. A straight dotted line shows the natural trajectory of 2016–2019 hiring extended through subsequent years. The dot-com recession trajectory line is based on data from February 2001 to February 2003, transposed to future years. The base-case line is Vanguard’s median for projections, but considerable variability is possible.
Sources: Vanguard calculations, based on data from Moody's DataBuffet and the U.S. Bureau of Labor Statistics. Data as of February 28, 2023.
Although the initial rounds of layoffs began last year, the net number of tech jobs in the U.S. actually increased through year-end. By Schickling’s calculations, head counts rose more than 18% from May 2020 through the end of 2022. In contrast, the decline for the first two months of 2023 amounted to less than half a percentage point.
The headlines about layoffs can be a bit deceiving, said Scott Miles, a Vanguard fixed income senior credit analyst: “Some firms overhired and had to scale back. But the reasons varied for others. Some are redirecting resources from one product to another and are not actually reducing total head counts.”
Even people who had to leave their companies are finding jobs quickly, Schickling said, and that trend is likely to continue for the short term. “These workers’ skill sets are still highly in demand in the broader economy,” he said. “They are likely to be absorbed by other industries, like industrial manufacturing, health care, and financial services.”
That makes this job market very different from those that followed the dot-com bubble or the global financial crisis.
News of layoffs and bank closures did not stop the Federal Reserve from raising interest rates in its fight against inflation, though policymakers have made their rate hikes smaller. A tighter labor market makes the Fed’s job more challenging because it suggests that wage growth may remain elevated, making it harder for the Fed to stop its hiking cycle and to eventually move on to rate cuts.
Vanguard has not changed its projection of a mild recession in the second half of 2023 or early 2024 in the U.S. and other developed countries. Broad job losses and a rising unemployment rate will likely occur more gradually than in past recessions. Vanguard’s base-case expectation is for unemployment to rise to 4.5%–5% by year-end, up from the current 3.6%. That is more moderate than the peak post-dot-com unemployment rate of 5.5% and half the October 2009 rate of 10%.
“It will likely be a gloomier labor market than now,” Schickling said, “but nothing close to the scale that we saw in the Great Recession.”
Notes: All investing is subject to risk, including the possible loss of the money you invest.