The Washington Post

Pessimisti­c Big Tech braces for a recession

- BY RACHEL LERMAN AND GERRIT DE VYNCK

Big Tech is bracing for an economic recession and an uncertain future. That, in turn, is triggering more economic angst.

The biggest tech firms, most of whom report quarterly earnings this week, have offered recent hints they are hunkering down. News of layoffs and hiring slowdowns have become commonplac­e across Silicon Valley. Startups are saying capital is drying up. Workers are being put on notice that businesses are changing.

Meanwhile, Twitter’s protracted bad romance with Elon Musk is tangled up in court and the outcome is uncertain, a point the company made as it reported disappoint­ing numbers Friday. Amazon is facing a growing labor movement, and Facebook is facing a new advertisin­g climate. Regulators domestical­ly and

abroad are threatenin­g to crack down on the industry as a whole.

Social media company Snap’s stock fell nearly 40 percent Friday, the day after it reported worse-than-expected revenue growth and declined to give a prediction for future profit because of “uncertaint­ies related to the operating environmen­t.” Netflix last week reiterated factors such as “sluggish economy growth” as it lost subscriber­s.

And analysts are predicting this week’s numbers released by Amazon, Microsoft, Google, Facebook and Apple could be the starkest signal yet of how these companies will approach the coming months. Already last week, Bloomberg News reported on a hiring and spending slowdown at Apple — a gauge for how much consumers are willing to spend — news that helped to propel the major stock market indexes lower.

“The market looks at that, and basically the logic is, ‘Oh crap, if they’re doing this then what about the ones aren’t as strong?’ ” said Tom Essaye, president of Sevens Report Research. “‘And what are they seeing coming that everyone else isn’t?’ ”

Meta spokesman Tracy Clayton said the company would continue to make changes to some parts of its business because of the larger economic environmen­t. Apple and Amazon did not respond to requests for comment. Google, Twitter and Snap declined to comment. Amazon founder Jeff Bezos owns The Washington Post.

Tech’s hiring freezes and pessimisti­c prediction­s stand in stark contrast to the companies’ traditiona­lly bulletproo­f reputation­s for untrammele­d growth, prompting concerns from some economists and Wall Street investors. For the last decade, tech companies have soared, hiring tens of thousands of workers and amassing huge cash hoards through ever-growing profits. The share prices of firms like Amazon, Microsoft, Apple and Google kept marching skyward, dominating stock exchanges and making many investors rich.

As some of the most valuable companies in the world, they also wield outsize influence on perception­s of the economy, in part because of the nature of their businesses, which relies on consumer clicks and spending. Any downturn in demand for toilet paper sold by Amazon, Teslas or iphones, as well as fewer ads bought on Instagram or Google search to try to sell people new shoes or headphones, is sure to create jitters in other spheres.

Tech has been signaling to investors for months that the boom times are ending — Amazon was one of the first tech giants to warn earlier this year that it had hired too many warehouse workers and had overbuilt anticipati­ng higher customer demand that instead began to wane as coronaviru­s lockdowns were lifted and habits shifted out of pandemic modes.

Tesla reported better-thanexpect­ed earnings on Wednesday, but even during that call, CEO Elon Musk and other executives were grilled by analysts on the topic of a potential economic downturn. Musk said earlier this summer that he had a “super bad feeling” about the economy, and expected the automaker to reduce its salaried workers by about 10 percent.

“We need to be more entreprene­urial, working with greater urgency, sharper focus and more hunger than we’ve shown on sunnier days,” Sundar Pichai, chief executive of Google-parent Alphabet said in a memo to employees recently. The company will cut its frantic pace of hiring and new employees will be concentrat­ed in engineerin­g and other technical roles, he said. “Making the company more efficient is up to all of us.”

Earlier this year, Facebook for the first time reported a decline of daily users, which combined with increased competitio­n, a lower revenue forecast and advertisin­g business hurdles sent its stock prices plummeting. The company’s stock is now down 50 percent for the year. And Facebook earlier this month told its engineerin­g managers to weed out low-performing employees in the face of a downturn. “If a direct report is coasting or is a low performer, they are not who we need; they are failing this company,” the company’s head of engineerin­g wrote in a memo.

Microsoft recently removed open job listings from online, Bloomberg News reported.

It can become a self-fulfilling prophecy, market experts say, if other companies immediatel­y react to Big Tech’s buckling down by tightening their own businesses. But the moves aren’t cut and dry — many feel tech is preparing for an economic downturn, not panicking because of plummeting business metrics.

“You have some that view it as a positive because companies are getting more discipline­d,” said Kristina Hooper, the chief global market strategist at Invesco.

Big Tech was also more successful during the pandemic than many industries, giving them more room to fall.

“It didn’t shed as much labor in the pandemic, so it didn’t have the same shortages coming out,” said Harvard economics professor Jason Furman. “So in some ways, it’s not a surprise that as the economy looks like it’s headed into a rougher patch that they need to recalibrat­e.”

And, despite widely expected poor numbers this week, many of the companies have already driven down expectatio­ns so much, that earnings may not be as bad as feared, the analysts said.

Smaller tech firms have been sounding the alarm for months, with new venture capital investment­s slowing and many start- ups announcing layoffs through the spring and early summer.

Other economic indicators are giving a mixed picture of where exactly the economy is headed. Americans are pessimisti­c about high prices, but they’re still spending their money. The pace of new hiring isn’t as fast as it was a few months ago, but it’s still far from petering out completely. Some economists and financial analysts still predict a recession later this year or in 2023, though that doesn’t mean it will be as painful as the one that followed the 2008 financial crisis.

Some of the cuts in the tech industry have been a long time coming, with new investment money too freely available for so long that some companies became bloated with resources they didn’t necessaril­y need, said Doug Clinton, managing partner of tech investment firm Loup Ventures.

“When the world changes and capital gets tighter, everybody’s kind of looking and saying, ‘ We may not need as big of a staff as we thought,’ ” Clinton said. “We were kind of in the boom times, now we’re coming down the roller coaster into the tougher times.”

Kelsea Cozad, a marketing worker in Columbus, Ohio, was laid off this month when healthtech start-up Olive cut hundreds of staff, after admitting its “fastpaced growth and lack of focus” had strained the business.

Cozad immediatel­y put out feelers to find a new job, and said she’s had a good response. “There are a lot of people that are swimming in the waters, looking to hire,” she added.

Across the entire economy, job postings are largely holding steady, according to data from Indeed, a job-postings website. But software developmen­t job postings have declined more than 12 percent in the past four weeks alone, according to analysis from Indeed economist Annelizabe­th Konkel. The overall labor market is strong, but demand for tech workers specifical­ly is slowing down slightly, she said.

Overall hiring fell to its lowest rate since December 2021, wrote Linkedin economist Guy Berger, “suggesting that tighter financial conditions and softening demand might finally be hitting the U.S. labor market.” Tech was especially hard hit, he noted.

Big Tech has been “spending money like drunken sailors in terms of hiring the last few years,” said Wedbush analyst Dan Ives. “I view it as more as a correction, a tightening around the edges.”

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