This analysis was first published in SvD Näringsliv, in Swedish, on November 3rd, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.
The triple rate hike was expected. But Fed chair Jerome Powell simultaneously sent new shockwaves with the announcement that the terminal rate may need to go even higher than the central bank had previously believed. Years of excess at the tech giants may now be coming to an abrupt end.
Five men sitting on a rooftop. All employed, but none of them with any project to work on. The newest member asks the others why they even come to work. The answer is short, concise — and telling for an era that now appears to be drawing to a close.
“Rest and vest.”
“Vest” means your stock options are paying out — typically gradually over several years. “Rest” means exactly what it sounds like.
The now-classic scene from the satirical TV series Silicon Valley illustrates how idleness and excess became an integrated part of many large tech companies. They have simply been so enormously profitable that it barely mattered — or seemed to matter — whether every employee was working at full capacity.
On the discussion forum Reddit, there is an entire section of tech workers openly describing how they hold multiple jobs simultaneously without their employers noticing.
That era now appears to be ending.
When American central bank chief Jerome Powell announced, on Wednesday evening Swedish time, the expected rate hike of 75 basis points — to the range of 3.75–4 percent, the fourth consecutive rise — he simultaneously signalled a gravity for the American economy that is hard to ignore, even for the very largest companies.
Sundar Pichai, CEO of Alphabet (Google’s parent company), had been on this question earlier in the autumn. At a conference he talked about how he believed the company could increase its productivity by 20 percent, and admitted that internal bureaucracy could slow decision-making. Turning around a company of that size is no trivial matter, however. In Alphabet’s latest quarterly report, the number of employees had grown by over 36,000 in just one year, to a total of 186,779. For comparison, that would make it Sweden’s fourth-largest city.
That it is hard to maintain productivity at this scale is therefore not surprising. The adjustment for many tech giants is likely to be both painful and slow.
A big part of the reason is that employees have limited incentive to help. They get free food, laundry services and gym access, and have earned fortunes as American middle managers while share prices rocketed.
Despite recent declines, Alphabet’s share is still up over 3,200 percent since its IPO in 2004.
But growth has stalled and margins have shrunk. Alphabet — despite all the new hires — grew revenue by just six percent in the third quarter, compared with 41 percent the year before. The profit margin fell from 32 to 25 percent. The immunity to bad times that tech giants once displayed has vanished.
The same pattern is visible at other giants. Amazon recently forecast a weaker fourth quarter than expected, with a growth rate of between 2 and 8 percent. A company of Amazon’s size — over 1.5 million employees — can both influence the American economy and act as a barometer for it. That figure spans office, delivery and warehouse workers. Most of them have not had the luxury of sitting on a rooftop doing nothing.
During the holiday rush at year’s end, Amazon will hire 150,000 people in the US to handle demand — the same number as last year. But in October, 10,000 open office positions were quietly cut as the economic outlook grew increasingly bleak.
CNBC’s legendary commentator Jim Cramer — known for his often dramatic formulations — said Amazon will need a dedicated team with a single goal: firing people. According to Cramer, the company may need to lay off around half a million workers.
In total, over 95,000 tech workers have lost their jobs this year, according to the site Layoffs.fyi.
When Jerome Powell earlier this year said that a 75-basis-point hike “was not something the committee was actively considering,” the tech-heavy Nasdaq 100 immediately rose 3.4 percent. The hope of a so-called “soft landing” for the economy was still alive, and tech companies could keep developing in a low-interest-rate world.
Now the situation is suddenly the reverse. Rates are at their highest since 2008. Neither the tech companies nor their employees have experienced anything like this before.
After more than 15 years of almost incomprehensible success and excess, a new reality is drawing closer. When tech workers realise that the best years may be behind them, daily life will get harder for them too. That is precisely the message Jerome Powell wants to send. And on Wednesday he was clear on one point: future hikes may come in smaller steps, but the Fed has no plans to pause. If anything, rates could end up higher than the central bank had previously anticipated.
Meanwhile on Nasdaq, the big tech stocks lit up red: Alphabet, Amazon and Meta all fell to year lows on Thursday. Apple fared slightly better but still dropped around 5 percent. The Nasdaq Composite fell 3.4 percent.
