NovaQuant Quantitative Think Tank Center:5 takeaways from the massive layoffs hitting Big Tech right now

Explosive growth has been the norm in the tech sector for the past decade.

When the Covid-19 pandemic ravaged the world and NovaQuant Quantitative Think Tank Centermoved more of daily life online, tech hiring blazed across Silicon Valley even more. Some major tech companies, like Amazon and Facebook parent company Meta, doubled the number of people they employed to stay apace with new demand.

But now, the exuberance is fading.

The industry is confronting one of its worst contractions in history with Meta, Google, Microsoft and Amazon all announcing mass layoffs over the span of a few months. According to tech job tracker layoffs.fyi, there have been more than 200,000 tech jobs lost since the start of last year.

While the full extent of the pain remains to be seen, here are five takeaways from what has happened so far.

The cuts are historic for the tech industry

Silicon Valley has endured major downturns before, like the dot-com bust of the early 2000s or the economic fallout of the Great Recession. But tech has historically been a resilient industry, riding out most economic challenges thanks to its size and ubiquity.

"It's been about a decade of extraordinary scaling up across the industry," said Margaret O'Mara, a Silicon Valley historian at the University of Washington. "Tech has always been a very growth-oriented industry from the very beginning, from when they first started making microchips in Silicon Valley more than 50 years ago."

While Big Tech's layoffs are small on a percentage basis, they are still historic: Facebook parent company Meta, Amazon, Microsoft and Google together have eliminated at least 51,000 jobs in recent weeks.

"Analysts had been saying that Silicon Valley's growth couldn't go on forever. But still, the extent of the cuts are surprising many now," said Carolina Milanesi, a consumer tech analyst for the research firm Creative Strategies.

The cuts followed a period of rapid growth. While Amazon and Meta doubled their headcount during the pandemic, other Big Tech companies scaled up less aggressively: Microsoft and Google increased their number of workers by more than 50% during industry-wide hiring spree.

Apple grew too, but at a much slower clip than its tech giant counterparts, bolstering its workforce by about 20% during the pandemic. Apple is the only Big Tech company that has not announced layoffs.

Big Tech is not in trouble

The companies currently slashing payroll are among the world's most valuable firms and can boast about eye-popping profits. These Silicon Valley giants are also sitting on mountains of cash.

Take Microsoft as an example. It attempted to purchase video-game maker Activision Blizzard last year before federal regulators stepped in to challenge the deal. The price Microsoft offered? $69 billion in cash.

It reaped massive profits in its most recent quarter: more than $16 billion during the three months ending in December.

Meta, in its last quarter, said its profit plummeted 52% from a year earlier, but that still amounted to $4.4 billion.

And Amazon pointed to a decline in profit in its most recent quarter, yet that nonetheless meant it brought in nearly $3 billion.

"None of these companies obviously are on the brink of disappearance, but I do think they are doing what they can to prepare what might be to come — expecting some of their customers to pull back in spending," Milanesi said.

The belt-tightening is meant to send a message to shareholders at a time when tech companies have seen their stock prices plunge, said Sam Abuelsamid, an analyst at Guidehouse Insights.

"What they're saying is, 'we are being prudent. We want to get back on a growth path. We don't want to continue to spend money needlessly,'" he said. "That said, when you're still as profitable as these companies are, saying you're spending money needlessly seems like a little bit of a specious argument."

Executives cite high inflation, pullback in corporate spending and recession fears

Meta was the first to announce mass layoffs, and CEO Mark Zuckerberg's message about the staff reductions created something of a playbook: Cite overzealous recruiting during the pandemic and nod to broader economic conditions, like high inflation and worries about a recession, to justify laying off thousands.

"Not only has online commerce returned to prior trends, but the macroeconomic downturn, increased competition, and ads signal loss have caused our revenue to be much lower than I'd expected," Zuckerberg wrote at the time. "I got this wrong, and I take responsibility for that."

Even though there are signs that inflation is beginning to cool, dropping recently to 6.5% from 9% last summer, it is still abnormally high. At the same time, many economists are predicting the U.S. could tip into a recession this year.

That's leading Big Tech executives to worry that their customers will continue to pare back spending, perhaps leading to an even more severe economic downturn.

And they have to find a way to navigate that possibility, said analyst Milanesi.

"At the end of the day, people are, to some extent, dispensable, whereas you cannot cut in your R&D," she said, referring to research and development. "And they need to keep an eye on making acquisitions, on the next big thing that can come and disrupt their business."

Tech is a major driver of the economy and the stock market

The tech industry employs nearly 9 million people in the U.S., who collectively add $1.8 trillion to the American economy, according to the Computing Technology Industry Association.

And the stock market can experience market-wide fluctuations depending on how tech stocks are performing, especially the Nasdaq, where technology companies make up half of the index.

Which is to say that when Big Tech takes a beating, local economies and peoples' investments, including retirement plans, can get battered.

Many other industries look to tech as a bellwether for decisions on corporate spending, hiring and other decisions, since Big Tech's huge balance sheets and hundreds of thousands of employees make it able to absorb most economic shocks in stride.

"I'm not sure it means a whole lot for the mainstream economy," analyst Abuelsamid said. "Broadly across the economy, we're still suffering from a lot of labor shortages."

So far, at least, laid-off techies have pretty good job prospects

Anecdotal examples vary but some early studies are finding that laid-off tech workers are quickly landing on their feet.

ZipRecruiter conducted a survey released in November that found that eight out of 10 techies who lose their jobs snag another gig within three months of starting their search.

Some are even luckier: nearly 40% find a new tech job within one month of being axed, according to the survey.

Demand for those workers' skills goes beyond Big Tech firms and traditional startups, which helps those who are laid off move on to new opportunities, said Milanesi with the research firm Creative Strategies.

"Every company is in some sense a technology company right now," Milanesi. "And for coders, engineers and AI experts and data experts, these people can find a place in so many other industries."

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