The tech layoffs are here. What investors need to know.

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A person walks past The Spheres at Amazon.com headquarters November 14 in Seattle, Washington. Government data shows key tech categories adding thousands of jobs in October.

David Ryder/Getty Images

About the Author: Rucha Vankudre is a senior economist at Lightcast, a labor market analysis firm.

The roll call of big tech companies laying off workers continues to grab headlines and feels like the sky is falling. But in reality, companies like Meta,

Lyft
,

Stripe and Twitter represent only a fraction of the tech sector and an even smaller share of overall employment.

The Bureau of Labor Statistics categorizes most technology companies into the “information” and “professional and business services” categories. Layoffs have actually fallen in those sectors, while job postings have also increased, according to the latest data from the federal job postings and labor turnover survey. More recent data show similar trends. The BLS’ October jobs situation report shows “information” adds 4,000 jobs and “professional and business services” adds 39,000 jobs, numbers that may seem small but are substantial in the climate current economy.

The reality is that many tech companies have never stopped hiring, including early-stage startups that are less impacted by declining venture capital funding. These new companies could not afford to compete with big companies to attract talent until recently. But the slowing economy driven by the Federal Reserve’s interest rate hikes has created a more level playing field, making now the time to keep hiring.

Companies remain keen to hire workers with technical skills. Software workers who have been laid off are likely to land quickly on their feet. Unemployment for computer and math workers was 2.2% for the month of October, according to the Current Population Survey, which is only slightly higher than the previous month and the same rate as in October 2019. The most affected professions were actually business and financial operations. Stripe and Meta both mentioned that they would disproportionately cut their recruiting services as they cut hiring, and the unemployment rate for this group was 2.9% in October, by far. the highest of the year. Amazon is preparing to lay off thousands of workers in its devices business, human resources and retail, The Wall Street Journal reported.

Layoffs aren’t everything either. While hiring freezes are often discussed in the same breath, they are not the same thing, and it is important to clarify their different implications. Some companies, like

Apple
,

are not getting rid of workers for the time being, but rather suspending their expansion. This strategy is more like a holding pattern than a forced landing. Additionally, many of the current vacancies are the same ones that these companies have been unable to fill over the past year due to the tight labor market.

In many cases, the layoffs we see also reflect past decisions, not just future expectations of a downturn. There are three main conditions to which tech layoffs seem to respond.

First, many big tech companies have seen rapid revenue growth during the pandemic and are correcting their trajectory now that the economy is normalizing. Wayfair and Peloton were hugely popular when many consumers were stuck at home redesigning their home offices and gyms. As people return to their previous lives, their spending habits have changed and businesses have had to adapt. Executives at many of these companies — Shopify, for example — said they were over-hiring and misjudged how long pandemic spending habits would persist.

Second, prices continue to rise faster than usual, and the Fed’s interest rate hikes have failed to dampen inflation as quickly as many had hoped. The Consumer Price Index for October showed that prices increased by 7.7% compared to the same period last year, while in the past month prices increased by 0, 4% overall and 0.3% in the “core”, which excludes volatile categories. While these numbers are better than previous months, it will still take time for consumers to feel relief. Discretionary consumer spending is often the first type of spending to come under inflationary pressure, and as incomes decline, luxury goods companies, such as

You’re here
,

are looking for ways to cut costs.

Third, companies like Meta,

red fin

and Snap are paying the price for bets on unsuccessful strategies. Meta’s forays into the “metaverse” and Redfin’s homecoming experience, RedfinNoware, are two high-profile examples. Additionally, many big tech companies have never made a profit (Zillow and Lyft, for example) and have instead been fueled by promises of future growth. As the economic climate has changed, investors are less inclined to give them the benefit of the doubt.

As Yogi Bera once said, “you can observe a lot by just looking”. That’s true in this case, where the headlines are reporting high-profile layoffs, while the broader job market is moving in a different direction. The layoffs are certainly hard on the employees experiencing them, but by most indicators, the labor market as a whole remains strong. BLS data shows there are still 1.85 job openings for every unemployed person and unemployment remains low. With baby boomers retiring and changing demographics, there are still not enough workers for everyone. For employees of companies with good financials and strong business models, large-scale layoffs are not likely to happen.

Guest comments like this are written by writers outside of Barron’s and MarketWatch newsroom. They reflect the views and opinions of the authors. Submit comment proposals and other feedback to [email protected]

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