Compounding Works Both Ways
According to Crunchbase, 77,000 Tech related jobs were cut so far in 2023 and over 140,000 tech related jobs were cut in 2022. These numbers on the surface may not seem significant compared to the 155 Million employees in the United States, but I believe this is just the start of the negative compounding in the economy we are about to witness.
Whether we are in a recession or not, the job loss in the tech sector has the potential to negatively impact the U.S. economy. Think of this as the start of a snowball in some very good packing snow. As the snowball is formed, it is small and unnoticeable from a distance. As the snowball moves though, the snow along its path begins to compact onto the snowball, increasing the snowball’s size rapidly. The snowball starts to become noticeable, and people stop to watch as it rolls more aggressively and grows even greater. Soon the whole neighborhood is watching this snowball form as it now is too big to ignore. At some point the snowball is so large that there is no more room for it to move, so it stops and sits in its final resting place. Time passes by and the seasons begin to change. The massive snowball stays in place as the leftover snow melts around it. The temperature rises as spring enters into the picture, and you can still see the last part of the snowball hanging around as the sun slowly melts it away. Finally, the snowball disappears, and the ground is wet. There is a new season with new flowers and new life.
What does this have to do with the global economy? Think of these tech related job losses we have seen so far as the fresh packing snow all around the U.S. economy. The snowball already started forming in 2022 as technology-based companies laid off approximately 140,000 employees. These employees are not low salaried workers either. Many of these employees were working in coastal cities making $100,000+ per year without including stock-based compensation. Remember when the snowball starts to grow it does not get noticed right away. We are a little over one month into 2023 and the number of tech-based layoffs has crossed 77,000 employees. This is more than half the layoffs experienced all last year in the tech industry. Are you following the snowball now?
Let’s run some quick math. The Gross Domestic Product (GDP) in the United States was $23.2 Trillion in 2021 according to the World Bank. Let’s keep this flat for 2022 since the year had some ups and downs in GDP growth. During the Great Financial Crisis in 2009, U.S. GDP fell 2.9%. This was a major decline for the U.S. economy, and it coincided with a banking crisis and a global growth slowdown. Let’s assume we are not heading into a banking crisis, but into a global slowdown. For easy math let’s predict the U.S. economy falls by 2% in this upcoming recession. Still significant, but not a financial crisis. For GDP to drop 2%, we would need to remove $460 Billion from GDP for rough numbers. Now we have our goal, what does the snowball have to tell us?
Let’s now assume of the 140,000 tech workers that were laid off in 2022, 80% of them were able to find an equally comparable role since the job openings in 2022 were over 1 for 1. That means at $100,000 per person, only $2.8 Billion of salaries were removed from the consumer spending system in 2022. Not very meaningful in the grand scheme of things. Next, the forecast for 2023’s job loss in the tech sector is on track for 600,000+ tech employees laid off. I am going to be conservative and say we lose 500,000 tech jobs at $100,000 per role. Since the job openings are still relatively high, I am assuming 65% of these workers find comparably paid roles quickly, leaving only $17.5 billion in lost salaries for 2023. But let’s add in the $2.8 Billion additional lost salaries from 2022 as I assume they still have not found work. At slightly above $20 Billion in lost salaries for tech workers only, this is not moving the GDP needle quite yet, but we are growing fast. What about 2024? Economic forecasters are saying the recession is not hitting the U.S. until 2024 now, so let’s assume a slightly worse scenario for that year. 1 million tech related jobs lost in 2024 with average salaries of $100,000 each role. This snowball is growing now. Now the economy is slowing, and the job openings are decreasing. Let’s assume only 50% of these 1 million laid off employees can find equivalent work. What does the overall number look like?
Note: I did not include unemployment benefits in this calculation as they are not material compared to the average salary of the tech related employees, and I am not factoring in stock-based compensation either. The net impact should be close to zero.
That is an estimated $70 Billion in lost salaries from the tech sector alone leading to 15% of the GDP reduction needed to get the economy by 2024 to a 2% annual contraction. Again, this is not earth shattering, but it starts to make this snowball become the center of attention.
The last assumption here is the employment multiplier. Let’s assume the technology-based wages have a multiplier effect on the overall economy of 1.5x. The $70.3 Billion in lost wages would lead to a $100 Billion hit to the U.S. economy or 25% of the GDP reduction needed to get the U.S. to a 2% GDP reduction. All of this from a light snow fall starting in 2022.
The above exercise hardly looks like a “soft landing” even though the impact may take several quarters to play out. Even with the start of 2023 being bullish for most global markets, I believe the reduction in technology-based jobs is just the beginning of this downturn. Technology related jobs make up roughly 6 Million of the 155 Million U.S. based jobs according to Statista and the Bureau of Labor Statistics, or 4% of the U.S. employees. Start compounding this negative effect through the economy and you can clearly see the snowball is going to be a noticeable one.
This scenario may have already been accounted for by the Federal Reserve though. Their focus seems to be honed in on job destruction, and seeing some of the highest earning employees experiencing aggressive job cuts may be according to plan. However, how smooth that plan plays out is still to be seen. I do not envy Jerome Powell’s role playing with fragility. Remember in 2007, most experts did not see the Great Financial Crisis coming. The headline of the Bloomberg article below dated December 2007 gives a perfect representation how fast things can change:
Headline From A Bloomberg Article (December 20, 2007)
Again, I am not predicting a repeat of the banking crisis from 2008-2009. I am pointing out though that most experts expected growth in 2008 to start of the year and the avoidance of a recession. Hindsight is always 20/20, but you have to admit the similarities today are concerning. Take a look at these recent headlines from major news outlets this month in comparison to the 2007 headline.
Headline From A New York Times Article (February 9, 2023)
Headline From A Forbes Article (February 13, 2023)
As the saying goes, history does not repeat itself, but it does rhyme. Cautiously playing this market rally has a better risk reward tilt than buying the dip.
Don’t fight convexity.
Disclosures: Funds I control are long volatility related investments.
This post consists of high level commentary on research conducted by Tetelestai Capital, LLC into economic conditions and job losses. Though compelling, your own research should always be done before investing into any security. The risks mentioned in this post are not all encompassing either. This post should not be viewed as investment advice. Tetelestai Capital is not associated with any of the investment companies or products mentioned in this post. If you have any questions about the research Tetelestai Capital conducts, please reach out through the website for more information.