New Year, New Layoffs

Layoffs aren’t fun. Anyone impacted is understandably devastated, others worry they will be next, and folks in charge second-guess themselves, not knowing how many cuts will be enough. As somebody starting a job in big tech soon, and with most of the layoff news centered on tech, I wanted to know more. I started by swimming through a deluge of company announcements and press coverage. If you’ve had a pulse and seen the news recently, then you’ll agree there are some issues with the reporting.

First, everything feels like a surprise. On November 9th, Meta says it’s letting 11k people go. One week later, Amazon announces a layoff of 10k. Carvana and DoorDash and others make smaller announcements, but otherwise things are relatively quiet in December. Then January 4th, seemingly out of nowhere, Salesforce says they’re firing 8K and Amazon comes back to the party to announce another 8K. The sense of randomness is scary, without a clear understanding of larger cause and effect.

Second, the coverage ignores company-specific context. A company might exclude context because it reflects badly on the health of their business, or they don’t want to give competitors too much insight into their strategy. A reporter might exclude context because the story is juicier without it. And the avalanche of announcements makes it hard for any observer to realistically get the right context on their own.

Let’s tackle these problems one at a time.

To beat back the feeling of surprise, what helped me was the most popular, magical drug of 2022. It starts with an m. I’m talking, of course, about macro. Much of the macro attention and discussion last year was about inflation – is it transitory? Is it peaking? Is it finally under control? This attention was well deserved. But based on the last few months of reports, inflation is coming down.

The Fed is doing its job by raising rates, and it’s effectively reducing inflation. But this is only part of the Fed’s job. Their ‘dual-mandate’ means they’re responsible both for controlling inflation and maximizing employment. What’s crazy is that these two responsibilities are basically at odds with each other. Each cycle has two parts:

1. Raise rates -> spending goes down -> revenue slows -> layoffs…

2. Lower rates -> spending goes up -> revenue grows -> inflation…

So what? Well, we shouldn’t be surprised about layoffs, for one thing. These are just the gears of the economy reacting the way they always do. But another valuable takeaway – any peak in inflation will be followed by a peak in unemployment. Huge ‘aha’ moment! Here’s a graph of inflation vs unemployment in the last 8 recessions.

With that bigger picture in mind, let’s move to problem #2.

Not all companies are created equal, and better coverage of a layoff means better context about the company and comparisons to other companies. Let’s look at the five companies I mentioned earlier: Meta, Amazon, DoorDash, Carvana, and Salesforce (note: I added the two Amazon layoffs together to get to the 5%).

This isn’t a deep dive on their financials, but it already helps paint a clearer picture about the relative size of the layoffs. Let’s look at them in more detail.

Meta – Flattening revenue is hugely concerning. Since Meta is also spending a ton on metaverse investments (partially as a result of this flattening revenue), it’s not surprising to see their layoff percentage among the highest on the list. They need the cost savings badly.

Amazon – Revenue growth is slowing, but not as severely as Meta. They have focused their layoffs on Retail and Devices divisions, while keeping more profitable units (i.e. AWS) intact. Honestly, Amazon’s culture of pushing out low performing employees might be helping them here too, letting them keep the layoff percentage relatively low at 5%. That said, I wouldn’t be surprised if future layoffs are announced that bring this percentage higher.

DoorDash & Carvana – The story on these two is similar. They both had crazy demand spikes during COVID, they are doing their best to understand a realistic growth rate for the business, and they may have overshot a bit (COGS growth well above revenue growth in last 12 months). Revenues are still growing at a healthy clip, but it might make sense to trim down slightly. When most other companies are doing it, you have some air-cover.

Salesforce – The acquisition of Slack in Q3 2021 probably contributed to the COGS overshoot, but a 10% layoff does feel relatively high given how strong their annual revenue growth looks. Digging into quarterly numbers, you’d see that the TTM revenue growth number is a bit misleading (too high), since the last two quarters have been worse than the first two. With the December announcements about co-CEO Bret Taylor and Slack CEO Stewart Butterfield leaving Salesforce soon, plus this layoff announcement, my gut tells me their yearend will not be good.

Comparing these five to each other helps, but let’s zoom out even further. Looking at Layoffs.FYI, there are 1255 layoff announcements where a percentage of workforce figure is given. If we take out the 102 companies that had a 100% layoff (shut down), here’s how the percentages shake out:

The median layoff for these announcements is 16%. Surprisingly high, right? Given all the hype around tech industry layoffs, I expected the median number to be closer to what we’re seeing in tech. Granted, tech companies employ a lot of people, so the impact of their smaller percentages is more severe. Still, zooming-out this way does help put things in perspective a bit.  

Good luck to everyone out there during layoff season. Hopefully the light at the end of the tunnel – and a bit of context – helps you the way it helped me.