‘Only the Paranoid Survive.’ Some CEOs Are Cutting Staff Even as the Labor Market Booms

Earlier this summer, Elon Musk reportedly emailed colleagues at his electric vehicle company Tesla that he had a “super bad feeling” about the economy and that he planned to cut staff at Tesla by 10%, a plan he later executed, the first in a steady stream of company announcements about layoffs that have accelerated this month.

The strange thing about Tesla boss Musk’s drastic decision is that his company is arguably having its best year ever. The second quarter of 2022 was “one of the strongest quarters of our history,” Musk said during an earnings call in July, adding that Tesla had the potential for a “record-breaking” second half of the year. Profit was $2.3 billion, double what it was last year and earnings per share significantly beat analyst estimates.

Musk is not the only CEO to be cutting jobs based on feelings of doom and gloom, even as their companies thrive. Oracle made cuts across the company even after reporting that revenues were up 5%—and that the company “finds itself in position to deliver stellar revenue growth over the next several quarters.” Microsoft laid off around 1,000 people and then reported in late July that profit rose 2%. Even Ford, which said in late July that its net income rose 19% and that consumers are buying products as quickly as the company can make them, is planning to cut thousands of workers in the coming weeks.

The debate over whether the U.S. is in a recession is ongoing, but if a recession does hit the American economy, it’s CEOs, not consumers, who should shoulder most of the blame after conducting widespread layoffs even as their companies are delivering strong performance.

Read more: Why a Recession Isn’t Inevitable

In some ways, the overall economy looks very strong. The U.S. economy added 528,000 jobs in July, the government said on Aug. 5, almost double what analysts had expected. The unemployment rate dropped to 3.5%—the lowest since the pandemic began.

And consumers are still spending big: Retail spending in July increased 11.2% over the previous year, according to the Mastercard Spending Pulse, which measures in-store and online retail sales across all forms of payment. (It’s helped that gas prices, one of the factors that pinched consumer pocketbooks, have fallen for 50 straight days and are near $4 a gallon.) Companies including Starbucks, Uber, Airbnb, CVS and Starbucks have said that they’re doing very well and that shoppers are coming out in droves. “We have yet to see signs of a slowdown,” Marriott CEO Anthony Capuano said on Aug. 2, as the company posted a 70% increase in revenue from last year.

Yes, there are some worrying economic indicators—the number of people filing for weekly unemployment benefits has been rising in recent weeks, GDP growth has been negative for two quarters, and interest rates are climbing. And it could be argued that strong company earnings reports only reflect how they performed in previous quarters. What’s more, some CEOs may be looking around and realizing that as they’ve had to offer higher salaries amid a war for talent, their payroll figures make them uneasy; hourly earnings are up 5.2% from last year. Still, some of the recent job cuts and hiring freezes are unusual because they are anticipatory, rather than a reflection of companies that are already struggling.

“I do believe only the paranoid survive,” Spotify’s Daniel Ek said, in late July, while announcing the company would “proactively” reduce hiring by 25%. “And we are preparing as if things could get worse, but it’s hard to be anything but optimistic given what I am currently seeing.” The company added 5 million more users than anticipated last quarter, and posted 23% revenue growth.

A changing attitude to job cuts

For much of the past century, companies didn’t lay off workers until they were in trouble and needed to cut costs, says Matthew Bidwell, a professor of management at the Wharton School at the University of Pennsylvania. Then, in the 1990s, even profitable companies started to downsize. “They got comfortable with, ‘we’re making money, but we can be making even more money,’” he says. This was around the time that companies stopped investing so much money in workers, getting rid of pension plans and other benefits for long-time employees, offering less training, and generally viewing workers as interchangeable. Those changes have made it easier for employers to justify cutting staff. In 1979, for example, fewer than 5% of Fortune 500 companies announced layoffs; during the Great Recession and its aftermath, 65% did.

Hiring and firing has become a way for CEOs to signal that they’re strong, decisive leaders, taking bold action, Bidwell says—even though those decisions might fly in the face of what might be best for the company and the larger economy.

That style of leadership continues to prevail despite hundreds of companies indicating that they’re abandoning this kind of shareholder capitalism in favor of stakeholder capitalism, an approach through which companies factor the interests of workers, the environment, and local communities into their decision-making process. But even companies that preach stakeholder capitalism appear not to be delivering on their promises. Some of the companies making recent layoff announcements have said they anticipate their businesses will continue to thrive this year, which raises the question of how they will continue to grow with fewer staff.

After Microsoft made its layoffs in July, the company reported that income had grown 2% and that it expected growth to accelerate. Amy Hood, Microsoft’s finance chief, told analysts on July 26, “We continue to expect double-digit revenue and operating income growth,” for the rest of the year.

Meanwhile, Unity Software laid off 200 people in June, weeks after reporting revenues up 36% from the previous year, and after CEO John S. Riccitiello said on an earnings call that Unity would “will sustain and sustainably grow revenue at or above 30% per year over the long term.”

Niantic, the private company that makes Pokemon GO and other games, said in June it would cut 9% of its staff to prepare for “economic storms that may lie ahead,” according to CEO John Hanke. The same month, Pokemon GO reportedly surpassed $6 billion in lifetime revenue, one of only a handful of games to pass that mark.

Layoffs like these could play a role in how the economy is perceived in the medium-to-long term, which may have a knock-on effect elsewhere in the economy. These layoffs are helping contribute to flailing consumer sentiment about the economy, which in itself could contribute to a recession. American households may cut back on spending in anticipation of bad times, even if their finances are doing well, and laid-off workers will behave cautiously until they find new jobs.

Retail giant Walmart, which is seen as a bellwether for the American economy, recently said its customers were already cutting back their spending on non-essential, high margin items, such as apparel, leading the company to slash its profit outlook and lay off hundreds of its corporate employees. The move sparked concerns about the health of the American consumer and sent shares in its competitors tumbling. Meanwhile another retail behemoth, Amazon, shrank its staff by around 100,000 last quarter.

The long-term effect of layoffs

Research shows that layoffs are almost always bad for a company, says Sandra J. Sucher, a professor of management practice at Harvard Business School. Workers who aren’t laid off will start looking around for other jobs because they feel uneasy about their employer’s prospects. Those who are laid off, especially in tech, will find jobs at competitors and help them innovate; Tesla’s recently fired employees have gone to competitors like Rivian, Apple, Amazon, and Lucid Motors, according to the news site Electrek. And blanket layoffs that try to hit a target percentage—say, 10% of staff—often end up purging people who play a vital role within a company, like those with unique relationships with customers or suppliers. Downsizing a workforce by 1% can lead to a 31% increase in voluntary turnover, according to a study by researchers at the University of Wisconsin–Madison and the University of South Carolina. Another study, by researchers at Stockholm University and the University of Canterbury found that after a layoff, survivors at the companies experienced a 41% decline in job satisfaction.

“The fact that these turn out to be self-defeating decisions make this a particularly bad strategy,” Sucher says.

What’s more, even well-qualified laid-off workers can struggle after losing their jobs; one study of workers who were laid off during an economic upswing found that only 41% had found work at equal or higher pay a year later. The rest had found lower-paying jobs or left the labor force altogether. When this happens to thousands of workers, there’s a ripple effect in the economy where even employed workers are cutting back to adjust to their new reality.

Layoffs used to be a sign of bad management, that you’re a CEO who doesn’t really know what’s happening with your company and can’t anticipate changes, Sucher says. But that assessment has faded, in exchange for the idea that the sign of bad management is a falling share price. That’s why these staff cuts in the face of strong profits haven’t been limited to just this strange period of 2022 when no one seems to know what is going to happen in the economy. The Washington Post found in December 2020 that 45 of the 50 most valuable publicly-traded companies turned a profit between April and September 2020, and also that at least 27 of the 50 implemented layoffs over the same time period.

Many of those companies soon realized their mistake and scurried to add back workers as consumer demand boomed. They couldn’t fill some positions quickly enough, which ended up hurting their businesses. The pattern seems to be happening again. Marriott, for instance, laid off thousands of workers at the beginning of the pandemic and cut its corporate headcount by 17%. Then, in September, the company said it was in a “fight for talent” as it tried to recruit 10,000 new workers.

The conflicting behavior of business leaders is making it even harder to gauge where the economy is headed. But with each layoff and CEO prognostication of gloom in the face of growth, the possibility of economic storms ahead grows.