Cuts at Amazon and other tech companies don’t mean recession yet

The downturns of 2001 and 2007-09 are good examples. The deflated internet and telecommunications bubble in the early 2000s and then the mortgage and housing crisis in the mid-2000s emanated outward, hurting financial companies, consumer spending and business investment . This eventually led to economy-wide recessions and widespread layoffs.

Yet a careful reading of recent history is more reassuring. Some industrial fires do not spread. In 2015, a fracking crisis destroyed the energy sector, but the economic expansion became the longest on record.

Problems in some sectors, as in 2015, have so far remained contained, although signs of broader vulnerability remain. Perhaps the biggest threat is the Federal Reserve’s continued interest rate hikes, which affect nearly every household and business.

As in the 2000s, technology and housing are already faltering. Layoff announcements by Amazon, Microsoft Corp.

and other tech companies have dominated the commercial airwaves. Employment in the information industry as a whole remained unchanged at 3.1 million between July and January, with a slight decline among software publishers. Total employment rose sharply over this period.

More cuts could be coming as tech executives cut costs in response to pressures on their bottom line. Earnings for technology companies in the S&P 500 in the fourth quarter fell 8.4% from a year earlier, the worst performance since 2009, according to Refinitiv, which tracks earnings and analyst estimates.

At the same time, interest rate hikes designed by the Federal Reserve to slow growth and lower inflation have already crippled housing construction and depressed house prices. Residential construction has fallen for seven straight quarters, according to the Commerce Department. The S&P CoreLogic Case-Shiller National Home Price Index fell 2.7% between June and December on a seasonally adjusted basis.

Still, the latest labor market readings suggest that the U.S. economy as a whole continues to grow at a healthy pace.

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

“Layoffs are in the headlines, but it’s not very widespread,” said Joanie Bily, president of RemX, a staffing firm. The job cuts are “very focused right now on the tech sector and the companies that have benefited the most from the pandemic.”

The National Bureau of Economic Research, an academic group that determines when recessions begin and end, defines a recession as a significant drop in economic activity that spreads throughout the economy and lasts longer than a few months. Thus, a recession in one or two sectors would generally not qualify.

Yet the dynamics of recession are typically characterized by malaise in one sector triggering malaise in others. In 2007, falling house prices led to mortgage defaults, which led to bank losses, limited bank lending and reduced consumer spending. While job losses were particularly strong in finance and housing construction, virtually all sectors ended up contracting. In the early 2000s, a boom in the technology sector led to aggressive investment and then a downturn by companies in many sectors.

The 2015 fracking bust was different. Drillers overproduced, driving prices down. The industry boom collapsed as they cut investment and cut payrolls by around 50,000 over a two-year period.

While energy-producing regions have suffered, many consumers have benefited from falling gasoline prices. “A sharp and dramatic decline in oil sector investment was offset by consumer stimulus 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 bolstered by federal Covid-19 relief payments, and businesses have continued to hire even in the face of slowing sales due to the need to fill depleted ranks. This has led to low unemployment, rising wages and robust consumer spending, providing essential support to the economy.

The tech industry is going through its own cycle. It exploded during the pandemic as people moved their shopping and entertainment online. Then, when the economy emerged from the pandemic, many tech companies found they were overhiring. Amazon’s decline is an example of this overtaking going upside down. Meanwhile, real estate is poised for more fallout as the Fed continues to push interest rates higher.

A bi-weekly Census Bureau survey of 200,000 businesses in February found that executives in 16 of 19 industries believed conditions remained above average on the net, though the share of businesses in those industries describing conditions as excellent or above average has declined since July. Retail, hospitality and travel managers described conditions as below average.

The earnings picture presents a warning sign, however. Of the 11 S&P 500 sectors tracked by Refinitiv, earnings fell in nine in the latest quarter from a year earlier. Only energy and industrials saw profit growth. Widespread declines in earnings like this have been associated with recessions in the past. During the 2015 fracking crisis, by contrast, a majority of industries continued to see profit growth, even as energy profits fell.

If a growing number of companies react to falling profits by cutting employment, which then cripples consumer spending, it could trigger a recession. Analysts tracked by Refinitiv expect continued declines in earnings in the first and second quarters of this year as consumer discretionary, financials, materials and healthcare sectors suffer.

Another risk: the Fed has waged a campaign of interest rate hikes to slow economic growth and contain inflation, as was the case before the recessions of 2001 and 2007-09, but not in 2015. The effects of Fed tightening tend to seep into all countries. parts of the economy.

Analysts at Moody’s Investors Service, a ratings firm, are finding evidence that a growing range of industries could struggle to service debt over the next 12 to 18 months as interest rates rise and the debt matures. They marked six industries with a negative outlook over the next five years, including retail, automotive, shipping, chemicals, mining and forestry. A year ago, they only viewed one industry negatively. Hospitality, defense and airlines have a positive outlook, with seven other sectors seen as stable.

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

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