Week of February 13th, 2023

Key Points for the Week

• The stock market has had a strong start to the year.
• Technology company layoffs have dominated headlines, prompting renewed recession
• fears, yet the labor market has remained strong.
• Tech firms may simply be retrenching after a torrid pace of hiring over the past decade.
• The good news is the rest of the economy appears stronger than expected.

Economic Update

There has been a lot of speculation about how the Federal Reserve’s policies will affect the United States economy. Economists have differing opinions about whether the country is headed for:

• A recession, which occurs when the economy stops growing and begins to contract; or
• A soft landing, which occurs when economic growth slows but does not decline.

It’s an important question because recessions often are accompanied by layoffs, rising unemployment rates, dwindling investor confidence, lower consumer spending, lower corporate profits and stock market downturns.

The United States may be experiencing rolling recessions.

Now there’s a new economic meme making the rounds. It’s called a rolling recession, and it’s a bit of a hybrid. One industry suffers a contraction, then another, but the economy as a whole never swoons, and the job market largely holds up…That framework doesn’t explain everything that’s going on with this puzzling post-pandemic economy, but it’s as good a description as any of what the U.S. has been going through since the Federal Reserve began lifting interest rates from zero in March of last year.

Rich Miller, Bloomberg

Uncertainty around current economic conditions has a lot to do with the pandemic, according to Schwab’s chief investment strategist Liz Ann Sonders whose talk at the January National Retail Federation (NRF) conference was reported on by Fiona Soltes for the National Retail Federation. When lockdowns ended, demand for goods lifted prices and helped push inflation higher. When services became available again, demand shifted and we saw “pockets of weakness in many categories on the goods side, certainly in housing, that are definitely in recession territory.”

If rolling recessions don’t meld into a national recession, we could see continued economic expansion as inflation moves lower. It’s also possible we could see economic growth heat up and inflation remain at higher levels than we’ve become accustomed to having. It’s just too early to tell.

Major U.S. stock indices moved lower last week, reported Teresa Rivas of Barron’s. Treasury yields rose across maturities last week as economic data and Fed officials suggested that further rate hikes may be ahead.

This Week in the Markets

It has been a great start to 2023 for stocks. A pullback in stock valuations in February would be normal after a strong start in January.

In fact, September and February are the only months that have averaged negative returns since 1950. More recently, over the past 20 years, stocks have fallen in February. Now here’s the catch — most of the weakness in February occurs later in the month. So, starting this week and going into March, be aware stocks historically have taken a well-deserved break, and this could happen again in 2023. However, any potential pullbacks could offer opportunities for investors.

Putting Tech Layoffs in Perspective

It’s hard to get away from all the headlines about layoffs in the technology sector. Most recently, Yahoo announced it was laying off 20% of its workforce, about 1,600 people.

The firm Challenger, Gray & Christmas, Inc. tracks layoff announcements, and its most recent report was titled “Jan ’23 Recession or Correction?”. The firm reported that the tech sector announced cuts of 41,829 in January, which amounted to 41% of all announced layoffs. That was the second highest for the sector on record and represented a massive 158% increase over the 16,193 announced in December. Contrast that to January 2022, when there were just 72 announced layoffs in the sector.

Between November 2021 and January 2022, tech sector layoff announcements have totaled 110,793.

Tech Companies Went on a Hiring Spree Over the Last Decade

We reviewed employment in 25 top technology firms that represent about 25% of the S&P 500index. Total employment at these firms grew at a torrid 10% annual pace between 2015 and 2019. That pace surged after the pandemic hit. By the end of 2022, employment at these firms was 9% above the already-hot pre-pandemic trend! That translates to about 345,000 more jobs than would have been expected if hiring remained on trend.

Here’s a look at the top four: Apple, Microsoft, Alphabet, and Meta.

It shouldn’t be surprising that these companies are now retrenching.

A Sharp Contrast to the Rest of the Economy

The rapid growth rate of employment across the 25 tech firms we reviewed contrasted with the annual job creation pace of 1.6% across the entire economy (which is not terribly shabby) during that period.

Then the pandemic hit, and the economy saw massive job losses even as tech companies boosted hiring even more. It’s important to note the last two years were amongst the best on record with respect to economy-wide job creation, with 7.3 million net new jobs created in 2021 and 4.8 million in 2022.

Yet, employment remains 3% below the pre-pandemic trend. That translates to 4.5 million fewer jobs than would have been expected if the pandemic hadn’t hit.

Layoffs are Common, Even When Hiring is Strong

The tech sector looms so large in our minds, which is why tech layoff announcements make headlines and prompt renewed recession fears. However, layoffs number more than a million each month across the entire economy. Just in December, the Bureau of Labor Statistics reported 1.47 million layoffs. Across 2022, employers laid off about 17 million workers!

At the same time, the BLS estimated net employment rose by 4.8 million in 2022, the second-best year on record for job creation since 1940.

So, keep in mind that when companies announce layoffs, they’re not indicating whether these are “net,” as in whether these layoffs are net of other hiring or whether they’ve frozen hiring altogether.

The good news is the employment market looks really strong even as the tech sector reverses its recent hiring spree.

Employment

When companies total up assets and liabilities for accounting purposes, employees aren’t counted as assets. It’s a peculiarity that has significant repercussions and the potential to negatively affect both employees and shareholders, suggested Wharton professor Peter Cappelli in the Harvard Business Review.

Many common practices for managing employees are hard to explain. Why do companies obsess over cost per hire but spend so little time trying to see if they make good hires? Why do they provide so little training when we know it improves performance and many candidates say they’d take a pay cut to get it? Why do firms delay filling vacancies and let work go undone? Why do they spend so much money leasing personnel from vendors rather than hiring their own?

Wharton professor Peter Cappelli, Harvard Business Review

Cappelli contends the problem is rooted in the standards set by the Financial Standards Accounting Board (FSAB) in the United States. While many companies assert that employees are their most significant competitive advantage, that belief is not reflected in generally accepted accounting principles for publicly traded companies. FSAB-established standards don’t count spending on employees – such as wages, salaries, training and development, and benefits – as investments. Instead, those expenditures are treated as expenses and liabilities.

Under current accounting standards, layoffs are one way for employers to rapidly lower costs and make balance sheets look more attractive. The loss of knowledge, skills, and abilities that accompanies layoffs doesn’t factor into financial accounting, even though it may negatively affect company productivity.

While accounting standards have yet to change, companies’ thinking may be. In a Bloomberg opinion titled, ‘U.S. Companies Aren’t Firing People As They Usually Do’, Kathryn A. Edwards wrote, “…the trade-off between short-term cost-cutting and human capital appears to [be] changing as qualified workers become harder to find and hire.”

2022 IRA and Roth IRA Contribution Reminder

The deadline to make 2022 contributions to your IRA or Roth IRA is April 18, 2023. The total contributions that you can make annually to these accounts cannot be more than the following:

• 2022 maximum allowable IRA and Roth IRA contribution for those 49 and under: $6,000
• 2022 catch up contributions for those 50 and older: $1,000

If you have already contributed the maximum amount allowed for 2022, the total contributions that can be made in 2023 are:

• 2023 maximum allowable IRA and Roth IRA contribution for those 49 and under: $6,500
• 2023 catch up contributions for those 50 and older: $1,000

If you are unsure of how much you have contributed to your IRA or Roth IRA for the year 2022, or would like assistance in opening one of these accounts, please contact us.

Did you Know? This Week in History

February 16, 1968: First 9-1-1 Call is Placed in the United States

On February 16, 1968, the first official "911"; call was made in the United States. Now taken for granted as first course of action in the event of emergency by nearly all of the nation's 327 million people, 911 is a relatively recent invention and was still not standard across the United States for many years after its adoption by Congress.

As telephones became common in U.S. households, fire departments around the country recommended establishing a single, simple number to be dialed in the event of a fire or other emergency. A similar system had been implemented in the United Kingdom decades earlier, in 1936, when the code 999 was chosen for emergency telegraph and phone communications. The Federal Communications Commission decided to act in 1967, but the number itself came not from the government but from AT&T. AT&T suggested the number 911 because it was easy to remember and, crucially, had not yet been designated as an area code or other code, which would make the transition easier.

The first 911 call was placed by Rep. Rankin Fite, the Speaker of the Alabama House of Representatives, in the town of Haleyville, AL on February 16th of the following year. By 1987, 50 percent of the nation was using the system. Canada chose to adopt the same number for its emergency calls, and 98% of the US and Canada can now contact emergency services by dialing 911. 999 is in use in a number of former British colonies, and the number 112 is used in Russia, Brazil, and other nations, even sometimes routing to the same services as 911 in the U.S.

Weekly Focus

Being right half the time beats being half-right all the time.

Malcolm Forbes, Entrepreneur

Friendship with oneself is all-important, because without it one cannot be friends with anyone else.

Eleanor Roosevelt, Former First Lady of the United States