For this last quarter of the year, we have a cascade of news regarding layoffs, job cuts, mainly in the technology and crypto sector. Is this a sign of rising unemployment in the future by domino effect? This is what we will see in this article.
Is the job market weakening?
In the phase of a slowdown in economic growth, we have several stages that gradually fall into place. Generally, the downturn process can last around 24 months if it includes a recession and affects the employment part. Here is a reminder of the different steps:
1 / Real estate slowdown first
2 / Slowdown in new orders (ISM new orders)
3/ Slowdown in profits/financial results
4/ Slowdown in employment
Until then, we had the first three stages being slowed down. The slowdown process was accentuated by the monetary policy of central banks. The rise in rates gives more difficult financial conditions and therefore the cost of borrowing becomes less and less accessible.
It now remains to identify signs of weakness in employment, which remains the slowest part of the process. Generally, unemployment makes its peak before or at the same time as the bottom in the financial markets.
The technology sector, one of the most affected sectors
We know that during 2022, one of the most affected economic sectors remains that of technology. It is the one that has been the most impacted by the rise in rates and the monetary policy of the central banks. As there are many growth companies in technology, they have benefited during 2020-2021 from low rates and injections of liquidity. And in 2022, there was a reversal in monetary policy to control inflation and the reverse effects trickled down to the tech sector.
Here is a graph of the performance of the NASDAQ index and the technology sector:
If we look at the indicator below, we can see that there is an increase of 416% compared to last year. This increase was mainly completed in November. In addition, these job cuts come at the end of the year since companies must do the annual balance sheet and establish a restructuring if necessary.
The big names TECH as Meta Where Amazon also made job cuts. Here is a list of layoffs from the biggest companies:
The technology sector, a domino effect?
For now, we know that it is mainly the technology sector that has been affected. We want to know if this will have a domino effect on the rest. This sector represents only a small part of the general labor force. We know that during the covid, the era of everything online exploded. Consequently, this has led companies (mainly tech) to have to recruit more to meet the need in the face of confinement.
Here is an interesting graph that highlights the number of jobs created per year. We can see a rise from one year to another, and all of a sudden for 2022 a drop from 966k to 597k. This does not mean “recession” but we can clearly see that a slowdown in employment is quite marked for 2022. The beginning of the consequences of the restrictive monetary policy of central banks.
The case of cryptocurrency
The cryptocurrency industry accounts for about 4% of tech sector layoffs.
Here is a graph representing the share of layoffs concerning the cryptocurrency sector.
Just like the technology sector, we had a long bear market in the crypto market in 2022. Therefore, this had repercussions in the industry. Already in terms of capitalization, the 2022 bear market caused the market to lose around 63%.
Then the FTX case reignited the flame even more by declaring bankruptcy and having a domino effect on other exchanges. For example, we recently had two big platforms like Bybit which has just laid off 30% of its employees and Swyftx 40% of its employees. The society crypto.com reduced his team by 30-40% and BitMex plans to cut 30% of its employees. Of course, I’m not going to name all the layoffs.
The Consequences of Unemployment in the Crypto Market
Cryptocurrency remains an asset class just like the stock, bond, currency or commodity market. Therefore, an increase in the unemployment rate in the labor market has an impact on the asset class. As we know, the crypto market remains a more volatile and speculative asset class. As it is a riskier asset class, it is also one of the most popular when the conditions are there for risky assets (risk on). For now, if the risk of rising unemployment is apparent in the labor market in general, it implies that there will be even less liquidity available in the crypto market, and therefore the risk relative to the environment would be most important.
Employment figures
The figures alone are not interesting, it is the rate of change from one month to another that is interesting for interpreting the figures. That’s why if we take the example of unemployment claims, we just see that the numbers are moving in a slight range.
But if we take the same subject in parallel, ie unemployment claims, but calculate the average over 4 weeks, we see that this rate is getting closer and closer to the risks of recession (red line). So yes, this signal has happened many times in the past, and very often during a recession. This time, we are approaching this line but without yet making a recession official.
In the majority of cases, we will look at the unemployment figures (often late). For those most active in the financial markets, we will look at job creation figures such as the NFP (Nonfarm payroll). If we take the NFP figures apart, it is true that we can say that there is still job creation and therefore the labor market remains strong.
Once again, what interests us is the growth rate. It is here that I find it interesting to take a look at the following graph. One relates to NFP and the other to employment level data. The level of employment concerns the number of people engaged in productive activities in an economy. One stipulates job market growth at 2.8% (NFP) and the other at 0.8%, which leaves room for a big difference in reality. This also means that the growth in the level of employment is much weaker than at the start of 2022 and weaker than the average over the last 10 years.
CONCLUSION
We can conclude that certain aspects of the economy are increasingly affected, in particular because of the rise in interest rates. The continuation of the FED’s monetary policy could increasingly affect growth and other sectors. A risk of rising unemployment is present according to the figures. But given the growing labor shortage issues, this could mean just a minor increase.
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