The weird thing about Tesla Musk’s boss’s drastic decision is that his company is probably having its best year ever. The second quarter of 2022 was “one of the strongest quarters in 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 were $ 2.3 billion, double that of last year, and earnings per share significantly exceeded analysts’ estimates.
Musk isn’t the only CEO to cut jobs based on feelings of doom and sadness, even as their companies thrive. Oracle also made cuts to the company after reporting that revenues are up 5% and that the company “is in a position to deliver stellar revenue growth in the coming quarters.” Microsoft fired about 1,000 people and then reported in late July that profit was up 2%. Ford, which said in late July that its net income rose 19% and that consumers are buying products as quickly as possible from the company, also plans to cut thousands of workers in the coming weeks.
The debate over whether the U.S. is in a recession is ongoing, but if a recession hits the U.S. economy, it’s the CEOs, not the consumers, who should take most of the blame after conducting widespread layoffs even if their companies are offering excellent performance.
Read more: Because a recession is not inevitable
In a way, the overall economy looks very strong. The US economy added 528,000 jobs in July, the government said on Aug.5, nearly double what analysts expected. The unemployment rate fell to 3.5%, the lowest since the start of the pandemic.
And consumers are still spending a lot: Retail spending in July increased 11.2% from the previous year, according to Mastercard Spending Pulse, which measures in-store and online retail sales across all forms of payment. (It helped that gas prices, one of the factors that pinched consumer wallets, have fallen for 50 consecutive days and are close to $ 4 a gallon.) Companies like Starbucks, Uber, Airbnb, CVS, and Starbucks have stated that they are doing very well and that buyers are coming out in droves. “We have yet to see any signs of slowing,” Marriott CEO Anthony Capuano said Aug.2, as the company posted a 70% increase in revenue over last year.
Yes, there are some worrying economic indicators: the number of people applying for weekly unemployment benefits has increased in recent weeks, GDP growth has been negative for two quarters, and interest rates are rising. And it could be argued that the solid corporate earnings reports reflect only how they have performed in previous quarters. Additionally, some CEOs may look around and realize that because they have had to offer higher salaries in the midst of a talent war, their payroll figures make them uncomfortable; hourly wages increased by 5.2% compared to last year. However, some of the recent job cuts and hiring freezes are unusual because they anticipate, rather than a reflection of, companies that are already struggling.
“I think only the paranoid survive,” Spotify’s Daniel Ek said in late July, as he announced the company would “proactively” cut hiring by 25 percent. “And we are preparing as if things could get worse, but it’s hard to be anything but optimistic given what I’m seeing right now.” The company added 5 million more users than expected last quarter and posted revenue growth of 23%.
A changing attitude towards job cuts
For much of the last century, companies weren’t firing workers until they were in trouble and needed to cut costs, says Matthew Bidwell, a professor of management at the University of Pennsylvania’s Wharton School. Then, in the 1990s, profitable companies also started to downsize. “They felt comfortable with ‘we’re making money, but we can earn even more,'” he says. This was the time when companies stopped investing so much money in workers, eliminating retirement plans and other longtime employee benefits, offering less training, and generally considering workers as interchangeable. These changes have made it easier for employers to justify staff cuts. In 1979, for example, less than 5% of Fortune 500 companies announced layoffs; during the Great Recession and its aftermath, 65% did.
Hiring and firing has become a way for CEOs to signal that they are strong and purposeful leaders, taking bold action, Bidwell says, even though these decisions may run counter to what could be best for the company and the broader economy.
That style of leadership continues to prevail despite hundreds of companies indicating that they are moving away from this type of shareholder capitalism in favor of stakeholder capitalism, an approach whereby companies take into account the interests of workers, the environment and local communities in the their decision making processes. But even companies that preach stakeholder capitalism seem not to deliver on their promises. Some of the companies that recently announced the layoffs have said they expect their businesses to continue to thrive this year, which raises the question of how they will continue to grow with fewer staff.
After Microsoft fired in July, the company reported that income had grown 2% and it expected growth to accelerate. Amy Hood, chief of finance at Microsoft, 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 seeing revenue up 36% from the previous year, and after CEO John S. Riccitiello said in an earnings call that Unity “will support. and will sustainably increase revenue by 30% or more per year over the long term ”.
Niantic, the privately held company that makes Pokemon GO and other games, said in June that it will cut 9% of its staff to prepare for the “economic storms they might expect,” according to CEO John Hanke. That same month, Pokemon GO reportedly surpassed $ 6 billion in lifetime revenue, one of the few games to surpass that mark.
Layoffs like these could play a role in how the economy is perceived over the medium to long term, which could have a ripple effect in other parts of the economy. These layoffs are helping to sway consumer sentiment about the economy, which in itself could contribute to a recession. American families can cut spending in anticipation of tough times, even if their finances are doing well, and laid-off workers will behave cautiously until they find a new job.
Retail giant Walmart, which is seen as a prop for the US economy, recently said its customers were already reducing their spending on non-essential, high-margin items, such as apparel, by bringing the company to cut its profit prospects and lay off hundreds of its corporate employees. The move sparked health concerns for the American consumer and caused the shares of its competitors to plummet. Meanwhile, another retail giant, Amazon, reduced its workforce by around 100,000 in the last quarter.
The long-term effect of layoffs
Research shows that layoffs are almost always harmful to a company, says Sandra J. Sucher, a professor of management practice at Harvard Business School. Workers who don’t get laid off will start looking for other jobs because they feel uncomfortable about their employer’s prospects. Those who are laid off, especially in the technology sector, will find work with competitors and help them innovate; According to the Electrek news site, Tesla’s recently laid-off employees have gone to competitors like Rivian, Apple, Amazon, and Lucid Motors. And general layoffs that try to hit a target percentage, say 10% of staff, often end up eliminating people who play a vital role within a company, such as those with unique relationships with customers or suppliers. The 1% downsizing of the workforce can lead to a 31% increase in voluntary turnover, according to a study conducted by researchers at the University of Wisconsin-Madison and the University of South Carolina. Another study, conducted by the researchers The University of Stockholm and the University of Canterbury found that after a layoff, business survivors experienced a 41% drop in job satisfaction.
“The fact that these turn out to be counterproductive decisions makes this a particularly bad strategy,” says Sucher.
Furthermore, even well-qualified layoff workers can struggle after losing their jobs; a study of workers made redundant during an economic recovery found that only 41% had found work with equal or higher pay a year later. The rest had found underpaid jobs or had left the workforce altogether. When this happens to thousands of workers, there is a ripple effect in the economy where even employed workers are cutting to fit their new reality.
The layoffs were a sign of mismanagement, that you are a CEO who doesn’t really know what’s going on with your company and can’t anticipate changes, says Sucher. But that valuation vanished, in exchange for the notion that the sign of mismanagement is the drop in the share price. That’s why these headcount cuts in the face of strong profits were not limited to this strange period of 2022 when no one seems to know what’s going to happen in the economy. The Washington Post found in December 2020 that 45 of the top 50 publicly traded companies made a profit between April and September 2020 and also that at least 27 of the 50 layoff companies implemented over the same time period.
Many of these companies quickly realized their mistake and rushed to add new workers as consumer demand exploded. They failed to fill some positions quickly enough, which ended up hurting their businesses. The pattern seems to repeat itself. Marriott, for example, laid off thousands of workers at the start of the pandemic and reduced corporate staff by 17 percent. Then, in September, the company said it was in a “talent fight” as it sought to recruit 10,000 new workers.
The conflicting behavior of business leaders is making it even more difficult to gauge where the economy is going. But with every layoff and every prediction of the CEO’s sadness in the face of growth, the possibility of economic storms on the way grows.
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