Cuts at Amazon, other tech companies aren’t spelling recession just yet

Recessions in 2001 and 2007-09 were apt examples. The deflated Internet and telecommunications bubble of the early 2000s and then the mortgage and housing crisis of the mid-2000s spilled over and hurt financial companies, consumer spending and business investment. It eventually led to economic downturns and widespread layoffs.

Nevertheless, a close reading of recent history is more reassuring. Some fires do not spread. In 2015, a devastating bust took down the energy sector, but the economic expansion went on to become the longest on record.

The problems in some sectors, as in 2015, have so far been contained – although there are still signs of wider vulnerability. Perhaps the biggest threat is the Federal Reserve’s ongoing rate hikes, which affect almost every household and business.

As in the 2000s, technology and housing are already faltering. Termination notices from Amazon, Microsoft corp.

and other tech companies have dominated the airwaves. Employment in the information industry as a whole was unchanged at 3.1 million between July and January, with a slight decrease among software publishers. Total employment increased sharply during this period.

More cuts could come as tech executives cut costs in response to pressure on their bottom lines. Fourth-quarter profit for S&P 500 technology companies was down 8.4% from a year earlier, the worst performance since 2009, according to Refinitiv, which tracks earnings and analysts’ estimates.

At the same time, higher interest rates designed by the Federal Reserve to slow growth and push inflation down have already crippled housing construction and driven down house prices. Housing construction has fallen for seven quarters in a row, according to the Commerce Department. The S&P CoreLogic Case-Shiller National Home Price Index was down 2.7% between June and December on a seasonally adjusted basis.

Still, the latest labor market measures suggest that the broader US economy is still growing at a healthy pace.

In the six months through January, payrolls in 72% of industries tracked by the Labor Department’s Bureau of Labor Statistics continued to expand. That was down from an exceptionally high 90% in March last year, but still well above an average of 62% over the past three decades. During the past four recessions, however, contracting industries outnumbered expanding industries by as much as 10-to-one.

“Layoffs are in the news, but it’s not widespread,” said Joanie Bily, president of RemX, a staffing firm. Job cuts are “very focused right now on the technology sector and companies that benefited the most during the pandemic.”

The National Bureau of Economic Research, an academic group that determines when recessions begin and end, defines a recession as a significant decline in economic activity that is widespread throughout the economy and lasts for more than a few months. A decline in one or two sectors will therefore not usually qualify.

Still, the dynamics of a recession typically have a feeling of malaise in one sector which triggers discomfort in others. In 2007, falling house prices led to mortgage defaults, which led to bank losses, limited bank lending and reduced consumption. While job losses were particularly large in finance and housing construction, virtually all sectors ended up with contracts. In the early 2000s, a boom in the technology sector led to aggressive investment and subsequent cutbacks by companies in many industries.

The 2015 fracking bust was different. Drillers overproduced, sending prices lower. The industry’s boom turned to fallow when they slashed investment and cut payrolls by around 50,000 over a two-year period.

While energy-producing regions suffered, many consumers benefited because gasoline prices fell. “A sharp and dramatic decline in investment from the oil sector was offset by the stimulus to consumers from lower oil prices,” said Lutz Kilian, senior economic policy adviser at the Federal Reserve Bank of Dallas.

In recent years, household savings have been cushioned by federal Covid-19 relief payments, and businesses have continued to hire even in the face of reduced sales due to the need to fill depleted ranks. This has led to low unemployment, rising wages and robust consumer spending, providing critical support to the economy.

The technology sector goes through its own cycle. It flourished during the pandemic as people switched shopping and entertainment online. As the economy emerged from the pandemic, many tech firms found themselves over-hiring. Amazon’s withdrawal is an example of overreach going into reverse. Meanwhile, real estate is poised for more fallout as the Fed continues to push interest rates higher.

A bimonthly Census Bureau survey of 200,000 businesses in February found that executives in 16 of 19 industries said conditions remained above average on net, although the share of businesses in those industries describing conditions as excellent or above average had declined since July. Managers in retail, accommodation and travel described the conditions as below average.

However, the profit picture provides a warning sign. Among 11 S&P 500 sectors tracked by Refinitiv, earnings fell by nine last quarter compared to a year earlier. Only energy and industry experienced income growth. Widespread profit declines like this have been associated with recessions in the past. During the fracking bust of 2015, on the other hand, a majority of industries continued to experience profit growth even as energy profits fell.

If an increasing number of firms respond to falling profits by cutting employment, which then destroys consumption, it can lead to a recession. Analysts followed by Refinitiv expect continued profit declines in the first quarter and second quarter of this year, with industries including consumer, finance, materials and healthcare.

Another risk: The Fed has been on a campaign of rate hikes to slow economic growth and curb inflation, as it was before the 2001 and 2007-09 recessions, but not in 2015. The effects of Fed tightening tend to trickle down in all. parts of the economy.

Analysts at Moody’s Investors Service, a credit rating firm, find some evidence that a widening range of industries could experience debt servicing challenges over the next 12 to 18 months as interest rates rise and debt matures. They have identified six industries with a negative outlook over the next five years – including retail, automotive, shipping, chemicals, mining and forestry. They viewed one industry negatively a year ago. Hospitality, defense and airlines have positive outlooks, with seven other industries seen as stable.

“Changes in the industry outlook signal slowing recovery and deteriorating credit fundamentals,” Moody’s reported. “Refinancing will be more expensive and more difficult to implement.”

Write to Jon Hilsenrath at Jon.Hilsenrath@wsj.com