DGRS - Why Mass Layoffs Are Just Getting Started

Summary

• Layoff announcements are starting to pile up across the US economy.
• Employment is a lagging indicator.
• The economic cycle sequence argues that layoff announcements will intensify in the coming months.

Layoffs are starting to pile up across the US economy.

In just the last few months, we have seen layoff announcements from major companies like Microsoft (MSFT), Meta (META), Stripe (STRIP), PayPal (PYPL), Tesla (TSLA), and more.

Real estate company Redfin (RDFN) announced they were shutting down their home-flipping business and cutting 13% of their workforce amid weakness in the housing market.

Trucking giant C.H. Robinson (CHRW) recently laid off 650 employees after reporting weak third quarter earnings results. The CEO of C.H. Robinson also said that he did not forecast truckload demand declining as rapidly as it did.

Why are these layoffs starting to pile up all of sudden?

Just a few months ago, the major economic stories were about worker shortages, specifically truckers, and now we're seeing major companies announce sizable layoffs across all industries, from technology to housing to transportation.

Almost three months ago, I made a video and wrote a Twitter thread on the jobs market and predicted that the labor market was going to weaken massively in the coming 3-6 months based on the economic cycle sequence and based on my leading indicator of employment.

In this article, we'll review why layoffs are starting now and why they're going to get worse as we move into 2023.

To understand why layoffs are starting now, we have to understand the predictable sequence of the economy.

Employment is what we call a lagging economic indicator which means that it moves very late in the economic cycle. In fact, there have been many instances where job losses didn't begin until after the economy already was in recession.

In both the 1974 recession and the 1980 recession, the economy was adding jobs for up to eight months into the recession.

So to get an idea of where employment is going or where the lagging indicators of the economy are going, we need to focus our attention on what are called leading economic indicators.

Leading indicators, as the name suggests, are things that happen way before the economy falls into recession, not months after the recession already started, like employment.

When the Federal Reserve makes a big shift in monetary policy, that's the very first signal that the economy will change about a year or so later. It's often said that monetary policy has long and variable lags.

So in late 2021, the Federal Reserve started to announce a big change was coming. The Fed was going to move from very easy monetary policy, including low interest rates and quantitative easing, to tight monetary policy, including higher interest rates and quantitative tightening.

Whenever the Federal Reserve raises interest rates or tightens monetary policy, the industries of the economy that are most sensitive to interest rates feel this change first.

Right away, in early 2022, we started to see the housing market slow down very rapidly.

First the Federal Reserve raised interest rates, then the housing market started to slow down.

What happens next?

If the housing market slows down, that usually means the consumption of things associated with home buying will go down.

When you buy a house, you usually need home appliances, furniture, and maybe some basic home construction tools.

Every month the Census Bureau releases a report on retail sales activity, and we can actually break out the amount of retail spending that's going toward home appliances, furniture, construction materials, and motor vehicle parts.

When you adjust these items for inflation, you can see that the consumption of these housing-related goods turns down well in advance of recession.

After the pandemic and the trillions of dollars of stimulus money, there was a boom in housing and the consumption of housing-related goods. Housing consumption has now turned down, which is another warning sign in the sequence of events we're tracking.

First the Federal Reserve said they were going to tighten monetary policy, then they started to raise interest rates, then the housing sector started to cool down, and then we saw the consumption of housing-related goods start to decline.

If the slowdown has spread into the consumption of big bulky durable goods like home appliances, that puts downward pressure on the transportation industry or the industries that move these manufactured goods around the world.

This is why the comments on the downturn in the trucking market from the CEO of C.H. Robinson are very important in terms of the sequence of economic events.

Biesterfeld said he did not forecast truckload demand declining as rapidly as it did, as well as spot market and contract rates deflating considerably.

C.H Robinson Layoff Announcement

After a very sharp and sustained slowdown in the housing market, followed by weakness in retail sales of housing-related goods and then confirmation of that downturn by trucking companies, you have a very solid and reliable sequence of events that suggests the broader economy and employment will weaken.

These areas are all leading indicators, and when the sequence evolves in a very predictable way, it's confirmation that there is a cyclical process underway.

The message from this sequence of economic events also is highly consistent with a yield curve that is deeply inverted, a reliable leading indicator of recessions.

So just by studying that sequence, it's not a surprise that now, after these events transpired all throughout late 2021 and 2022 that we're getting announcements of layoffs in late 2022 and likely into 2023.

First the Fed tightens monetary policy, then interest rates go up, the housing market slows down, and the consumption of housing-related goods starts to decline.

Since the volume of goods moving around the economy has dropped, there's less demand for trucking and all forms of transportation. Now layoffs begin, and this is where the economy sits at the end of 2022.

At EPB Research, we also use a leading index of employment to gauge the future direction of employment growth.

The leading index of employment is comprised of several employment metrics, including the average workweek in the manufacturing sector, initial jobless claims, and more.

The leading employment index turned negative over the summer, ahead of the most recent wave of layoff announcements.

Not only has the leading index declined and remained in negative territory, but the sequence of events is actually still getting worse.

The Federal Reserve is still raising interest rates, the housing market is still slowing down, in much worse shape than it was a few months ago, and the decline in housing-related goods is still under pressure.

Layoff announcements have started to roll in but based on the sequence of economic events and the clear picture from the leading employment index, it looks like this softening of the labor market is just getting started.

The number of monthly job additions is trending lower but still at strong levels relative to history.

I expect this downward trend in monthly job gains to trend lower and turn negative over the next several months based on the increase in layoff announcements, the sequence of economic events, and the leading index of employment.

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