Earlier this summer, Elon Musk reportedly emailed colleagues at his electric vehicle company Tesla that he had a “super bad feeling” about the economy and that he planned to cut staff at Tesla by 10%, a plan he later executed, the first in a steady stream of company announcements about layoffs that have accelerated this month.
The strange thing about Tesla boss Musk’s drastic decision is that his company is arguably having its best year ever. The second quarter of 2022 was “one of the strongest quarters of our history,” Musk said during an earnings call in July, adding that Tesla had the potential for a “record-breaking” second half of the year. Earnings per share were significantly higher than analyst expectations and profit reached $2.3 billion.
Musk is not alone in cutting job positions based on doom-and-gloom feelings, even though his companies are thriving. Oracle made cuts across the company even after reporting that revenues were up 5%—and that the company “finds itself in position to deliver stellar revenue growth over the next several quarters.” Microsoft laid off around 1,000 people and then reported in late July that profit rose 2%. Ford claimed in late July its net income increased 19%. It also stated that customers are purchasing products as fast as they can be made. Ford plans to reduce thousands of workers over the next weeks.
The debate over whether the U.S. is in a recession is ongoing, but if a recession does hit the American economy, it’s CEOs, not consumers, who should shoulder most of the blame after conducting widespread layoffs even as their companies are delivering strong performance.
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The overall economy is strong in some aspects. On Aug. 5, the U.S. government announced that it added 528,000 jobs to its economy in July. That’s almost double what analysts expected. The unemployment rate dropped to 3.5%—the lowest since the pandemic began.
The consumer is still spending big. According to Mastercard’s Spending Pulse (which measures retail sales in stores and online across all modes of payment), July retail spending rose 11.2%. (It’s helped that gas prices, one of the factors that pinched consumer pocketbooks, have fallen for 50 straight days and are near $4 a gallon.) Companies including Starbucks, Uber, Airbnb, CVS and Starbucks have said that they’re doing very well and that shoppers are coming out in droves. “We have yet to see signs of a slowdown,” Marriott CEO Anthony Capuano said on Aug. 2, as the company posted a 70% increase in revenue from last year.
Yes, there are some worrying economic indicators—the number of people filing for weekly unemployment benefits has been rising in recent weeks, GDP growth has been negative for two quarters, and interest rates are climbing. It could also be said that company earnings reports are only reflecting how the quarters before them. What’s more, some CEOs may be looking around and realizing that as they’ve had to offer higher salaries amid a war for talent, their payroll figures make them uneasy; hourly earnings are up 5.2% from last year. However, recent job cuts, hiring freezes and other measures aren’t typical because they reflect companies already in trouble.
“I do believe only the paranoid survive,” Spotify’s Daniel Ek said, in late July, while announcing the company would “proactively” reduce hiring by 25%. “And we are preparing as if things could get worse, but it’s hard to be anything but optimistic given what I am currently seeing.” The company added 5 million more users than anticipated last quarter, and posted 23% revenue growth.
We need to change our attitude about job cuts
For much of the past century, companies didn’t lay off workers until they were in trouble and needed to cut costs, says Matthew Bidwell, a professor of management at the Wharton School at the University of Pennsylvania. Even profitable companies began to reduce their workforce in the 1990s. “They got comfortable with, ‘we’re making money, but we can be making even more money,’” he says. Companies stopped investing in their workers and began to offer less training and other benefits. These changes made it much easier for employers and employees to lay off staff. For example, in 1979, less than 5% Fortune 500 companies reported layoffs. However, during the Great Recession, and its aftermath, this number rose to 65%.
Hiring and firing has become a way for CEOs to signal that they’re strong, decisive leaders, taking bold action, Bidwell says—even though those decisions might fly in the face of what might be best for the company and the larger economy.
That style of leadership continues to prevail despite hundreds of companies indicating that they’re abandoning this kind of shareholder capitalism in favor of stakeholder capitalism, an approach through which companies factor the interests of workers, the environment, and local communities into their decision-making process. Even companies who preach stakeholder capitalism are not delivering on their promises. Recent layoff announcements by companies have indicated that they expect their businesses to continue to prosper in the coming year. This raises questions about how the company will manage to continue growing with less staff.
Microsoft laid off its employees in July. The company said that the income had increased by 2%, and it expects that this growth will accelerate. Amy Hood, Microsoft’s finance chief, told analysts on July 26, “We continue to expect double-digit revenue and operating income growth,” for the rest of the year.
Meanwhile, Unity Software laid off 200 people in June, weeks after reporting revenues up 36% from the previous year, and after CEO John S. Riccitiello said on an earnings call that Unity would “will sustain and sustainably grow revenue at or above 30% per year over the long term.”
Niantic, the private company that makes Pokemon GO and other games, said in June it would cut 9% of its staff to prepare for “economic storms that may lie ahead,” according to CEO John Hanke. Pokemon GO reportedly surpassed $6Billion in annual revenue the same month. It is one of a few games that has reached this milestone.
The perception of the economy in the short- and long-term could be affected by layoffs such as these. These may then have ripple effects elsewhere in the economy. This is contributing to an eroding consumer mood, which could lead to recession. In anticipation of recession, American households might cut their spending, even though they have good finances. Layoff workers may be more cautious until they can find work.
Walmart, a retailer that is considered a beacon for America’s economy, announced recently that its customers are already cutting back on their purchases of non-essential high margin products like apparel. The company was forced to reduce its profit outlook and laid off hundreds corporate workers. This raised concerns about America’s consumer health and sent its shares plummeting. Amazon also saw a reduction in its employees of around 100,000 during the quarter.
Layoffs have a long-term impact
According to Sandra J. Sucher (a Harvard Business School professor in management practice), layoffs almost always prove bad for companies. Workers who aren’t laid off will start looking around for other jobs because they feel uneasy about their employer’s prospects. Those who are laid off, especially in tech, will find jobs at competitors and help them innovate; Tesla’s recently fired employees have gone to competitors like Rivian, Apple, Amazon, and Lucid Motors, according to the news site Electrek. And blanket layoffs that try to hit a target percentage—say, 10% of staff—often end up purging people who play a vital role within a company, like those with unique relationships with customers or suppliers. Downsizing a workforce by 1% can lead to a 31% increase in voluntary turnover, according to a study by researchers at the University of Wisconsin–Madison and the University of South Carolina. A study by the University of Canterbury and Stockholm University found that survivors of layoffs experienced 41% less job satisfaction.
“The fact that these turn out to be self-defeating decisions make this a particularly bad strategy,” Sucher says.
What’s more, even well-qualified laid-off workers can struggle after losing their jobs; one study of workers who were laid off during an economic upswing found that only 41% had found work at equal or higher pay a year later. Others had either found jobs at lower salaries or quit the workforce altogether. When this happens to thousands of workers, there’s a ripple effect in the economy where even employed workers are cutting back to adjust to their new reality.
Layoffs used to be a sign of bad management, that you’re a CEO who doesn’t really know what’s happening with your company and can’t anticipate changes, Sucher says. In exchange, the assumption that falling shares prices is an indicator of poor management has replaced that old assessment. That’s why these staff cuts in the face of strong profits haven’t been limited to just this strange period of 2022 when no one seems to know what is going to happen in the economy. The Washington PostIn December 2020 it was found that 45 out of 50 publicly traded companies with the highest market value made a profit from April to September 2020. Additionally, at least 27 of 50 layoffs were implemented during that time.
Many companies realized what they had done wrong and began to hire workers again as the demand for goods increased. They couldn’t fill some positions quickly enough, which ended up hurting their businesses. This is a pattern that seems to be repeating itself. Marriott was one example. It laid off thousands and reduced its corporate workforce by 17% at the outbreak of the pandemic. Then, in September, the company said it was in a “fight for talent” as it tried to recruit 10,000 new workers.
Business leaders’ conflicting opinions make it difficult for us to see where we are heading. With each layoff, CEO prediction of doom in the face growth, there is more chance of economic disasters.
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