Layoffs: How Companies are Bracing for a Recession

On September 13th the most recent Consumer Price Index (CPI) report was released by the Bureau of Labor Statistics. It showed that inflation had increased 8.3% over the past year. This was higher than the 8.1% level that was forecast and it is the 6th consecutive month that the CPI readings have been above 8%, levels we haven’t seen since the early 1980s.

Inflation is a serious threat that can severely affect the economy. Not only does it hurt purchasing power but it also prevents people from saving and can damage industries within the consumer discretionary sector. 

The Federal Reserve combats inflation by raising interest rates. Higher rates make it costlier to take loans, which in turn causes consumers and businesses to spend less, which reduces the growth rate of the economy and slows inflation. However, slowing the growth rate of the economy can have many negative consequences, including a higher unemployment rate. 

This week, the central bank raised interest rates by 75 basis points for the third time in a row, bringing the Fed Funds rate to 3% - 3.25%, the highest level since 2008. These consecutive aggressive hikes are in direct response to multi-decade high inflation that is currently weighing on the economy. 

In addition, the Fed is forecasting interest rates to rise to 4.25%-4.50% range by the end of 2022 and 4.50%-4.75% by the end of 2023. 

The central bank is now acknowledging that a recession could be on the horizon, due to these rate hikes. At a news conference on Wednesday, Fed Chairman Jerome Powell said, “The chances of a soft landing are likely to diminish,” and, “No one knows whether this process will lead to a recession or, if so, how significant that recession would be.”

Many business leaders believe that a recession is inevitable. On Thursday, September 15th, FedEx @FDX missed earnings expectations and blamed it on an economic slowdown. In an interview on CNBC, when asked if this miss was a harbinger of a global recession, FedEx CEO Raj Subramaniam said, “I think so. But you know, these numbers, they don’t portend very well.”

In August, in a JPMorgan Chase @JPM client call, CEO Jamie Dimon said, "What is out there? There are storm clouds. Rates, QT, oil, Ukraine, war, China. If I had to put odds: soft landing 10%. Harder landing, mild recession, 20%, 30%. Harder recession, 20%, 30%. And maybe something worse at 20% to 30%.

And in a MarketWatch interview this week, Ray Dalio, the founder of the largest hedge fund in the world, Bridgewater Associates, was asked, “Do you think we're in a recession or headed to one soon?” His response was, “‘You’re starting to see all the classic early signs.” He said these signs are a contraction in the auto and housing industries, which are the first affected by higher interest rates. 

With such bearish views of the economy circulating, companies are bracing themselves for a recession by laying off employees. And this could be just the beginning of such cost-cutting measures; in a recent survey by PwC, 50% of companies expect to cut their workforce in the next six to twelve months. 

Below is a list of companies, in a variety of sectors, that have recently announced layoffs:

Consumer Cyclical

This week The Gap (GPS) announced that it would cut 500 corporate jobs in New York and San Francisco. In August the interim CEO also announced it would reduce operating costs.

Last month Wayfair (W) disclosed that it would reduce its workforce by about 5%, which translates to 900 jobs. The company said this reduction will help to, "manage operating expenses and realign investment priorities."

At the end of August Ford Motor (F)  said it was cutting 3,000 workers. These layoffs target white-collar workers and contracted employees. Ford CEO Jim Farley said he is looking to cut $3 billion on costs by 2026. 

Financial

JPMorgan Chase (JPM) hasn’t yet initiated any layoffs but last week the bank’s president, Daniel Pinto, warned that in Q3 its investment banking fees could drop 45% to 50%. He said that they would be considering reducing compensation as an alternative to layoffs. 

At the beginning of September, Credit Suisse Group (CS) said it plans to cut an estimated 5,000 jobs in an effort to reduce expenses. These measures would help the bank reduce $1 billion in costs.

In early August Robinhood Markets (HOOD) announced it would lay off a whopping 23% of its employees. Just three month prior the company reduced its workforce by 9%. CEO Vlad Tenev wrote that, “In this new environment, we are operating with more staffing than appropriate.”

Real Estate

This week Compass (COMP) announced a new wave of layoffs. This is after the company cut 10% of its workforce just three months ago. Real estate companies have been hit especially hard by rising mortgage rates, which are at levels not seen since 2008.

In July RE/MAX (RMAX) said it was cutting 120 employees, which is about 17% of its workforce. These layoffs point to a slowing down of the real estate market, as mortgage applications are 83% lower than they were one year ago.

In June Redfin (RDFN) reduced its workforce by 8%, which equates to about 470 employees. CEO Glenn Kelman wrote, “We could be facing years, not months, of fewer home sales, and Redfin still plans to thrive.”

Technology

In July Shopify (SHOP) said it was laying off 1,000 employees, which was about 10% of its workforce. The company said it was eliminating, “over-specialized and duplicate roles, as well as some groups that were convenient to have but too far removed from building products.”

Yesterday, the Wall Street Journal reported that Meta Platforms (META) is planning to cut expenses by 10%. This is in reaction to slower growth the social-media giant has been experiencing. It is also reported that much of this cost-cutting will be fueled by reduced employment.

Cryptocurrencies have plunged from all-time highs, which has negatively affected shares of Coinbase Global (COIN). In June the company announced it was laying off 1,100 workers, about 18% of its employees, as part of a cost cutting plan. 

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