Chapter 1: Understanding the Economic Seasons

In the realm of economics, I often liken the cycles to the changing seasons, particularly in a warmer southern U.S. state where fall is certain, but harsh winters are unpredictable. Here, steady economic growth symbolizes "spring," while an overheated economy signifies "summer." A recession embodies the feeling of "fall," and severe downturns represent "winter."

With the arrival of these seasons, we witness changes, and layoffs are at the forefront. Indeed, autumn has officially arrived.

While my analytical side wants to adhere strictly to the formal definition of a recession, the reality often diverges from the technicalities. With inflation at levels not seen in decades, exorbitant prices for housing and vehicles, and layoffs occurring at major financial institutions and tech companies, I believe we are experiencing a recession—at least in the colloquial sense.

The initial layoffs began in the cryptocurrency sector, which was anticipated. The tech industry as a whole has not fared well either. While some layoffs can be attributed to isolated cases of overexpansion or hype, the trend is becoming increasingly evident as more established companies join the fray.

Next up are the cyclical industries: construction, basic materials, certain consumer discretionary sectors, and financial services, including banks. Although the reasons for layoffs will vary this time, this sector is unlikely to emerge completely unscathed.

What is the current impact? How much further will this go? Which sectors are poised for significant declines? Let's delve deeper.

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Chapter 2: Factors Influencing Layoffs

Many pointed out during 2020 and 2021 that the ongoing influx of free money could lead to inflation. It’s surprising that this wasn't more apparent, especially considering various sectors of the economy were in steep decline. While I'm not inclined to play hindsight quarterback, it's important to recognize how these factors contributed to our current situation.

What's different now is that the supply and demand dynamics in real estate—often an early indicator of economic shifts—still favor sellers, at least for the time being. However, we have yet to fully grasp the extent to which rising mortgage rates and home prices will impact demand, especially as consumers grapple with increased costs in other areas.

So far, the signs are concerning. Having worked in lending at various financial institutions, I find myself bracing for potential layoffs. Currently, the financing volume I'm managing is merely 20% of what it was a year ago. While this is anecdotal, it reflects a troubling trend.

JP Morgan has announced plans to lay off around 1,000 employees from its lending division, with Wells Fargo likely to follow suit. Although my firm is still handling a backlog of new home deals, which cushions us somewhat, lenders who rely less on new home financing are certainly feeling the pressure.

The construction, real estate, and financial services sectors, which were relatively stable not long ago, are now facing layoffs as well. Firms like Redfin and Compass, which aren't directly responsible for the supply and demand issues, are also letting go of significant portions of their workforce.

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Chapter 3: The Tech Industry's Struggles

I wouldn't categorize the tech sector's challenges as negligent or malicious but rather as a result of naivety and overexuberance. Companies in crypto, fintech, and others will face significant repercussions in the months ahead.

Crunchbase offers a comprehensive and sourced list of tech layoffs in 2022, and the numbers are alarming. Many companies listed are lesser-known, suggesting some overhyped startups are having to recalibrate their expectations. Others, more established firms, are also feeling the strain, signaling a persistent downturn.

Coinbase and BlockFi, for example, are cutting 18% and 20% of their workforce, respectively. Cybersecurity firm OneTrust is letting go of around 1,000 employees, representing a quarter of its staff. The Zebra insurance company is also parting ways with 12% of its team, despite its heavy advertising presence.

In the past two months, companies like PayPal, Netflix, Vroom, Carvana, and Robinhood have initiated layoffs as well. The trend is accelerating, with only 13 firms reported in April compared to 47 in June.

Chapter 4: Future Ramifications and Market Dynamics

The current environment is markedly different from prior recessions. Not too long ago, we were discussing the "Great Resignation" and its impact on the labor market. While this trend reflected only about a 12.5% increase compared to previous years, it still represented a significant shift.

This might actually be beneficial in retrospect. If companies had reached desired staffing levels, the likelihood of layoffs would have been higher. Instead, companies are now appropriately staffed, which could be a silver lining for current employees.

Whether this will shift the balance of power back to employers remains uncertain. Historically, during recessions, employees often accept less and tolerate more, so it’s plausible that this cycle will follow suit.

However, not all sectors will be adversely affected. Specific fields may continue to grow and experience worker shortages. The challenges faced by cybersecurity firms don’t equate to a lack of demand for UX designers or systems administrators.

If the demand for real estate remains stable due to investor activity or a price correction, it could shield trades and construction workers from significant impacts. This would be a welcome development for those who faced job instability during the 2009 downturn.

Ultimately, the Federal Reserve's actions will play a crucial role. How much will interest rates need to increase to address concerns in other areas? Will affluent investors maintain sufficient demand? The livelihoods of many depend on the answers to these questions.

Regardless of the outcomes, challenging times appear to be on the horizon. While we may not technically be in a recession yet, that offers little comfort to those already facing job losses. With limited hope for legislative support, the best we can do is endure and remain hopeful for better days ahead.