Are Tech Layoffs an Indicator of an Imminent Recession?

Unemployment rate is often considered one of the key indicators of an impending recession. A rising unemployment rate can be a sign of a slowing economy and decreased consumer spending. This can lead to lower company profits and a decrease in business investment. Additionally, as companies see decreased profits, they may lay off employees, which can further contribute to a rising unemployment rate.

While unemployment is one of the indicators used to assess whether a recession has begun, joblessness tends to peak later and to persist well into a recovery. That's because the end of the recession marks the start of a rebound rather than its completion.

Let's take a look at the 2008 crisis. According to NBER (The National Bureau for Economic Research), recession began in December 2007 and concluded in June 2009. Yet in April 2008 the U.S. unemployment rate was still just 5%, up modestly from 4.7% six months earlier. Unemployment peaked at 10% in October 2009, four months after the official end of the recession and seven months after the bear market in stocks hit bottom as evident in the above graph.

Every recession has led to unemployment rate reaching its peak after the recession is over and we are already in recovery phrase as shown in the graph above, except for COVID-19 pandemic. In early 2020, the unemployment rate peaked at 14.7% in April 2020, the month the recession ended. That was the first time in at least 70 years that unemployment associated with a recession didn't peak when the economy was already in recovery

There is a more quantifiable way to analyze the correlation between unemployment rate and recession known as "Sahm rule". As per the whitehouse.gov website [1]

However, it's important to note that a rising unemployment rate alone does not necessarily indicate a recession is imminent. One would need to look at multiple factors as we outlined in our previous article here.

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Source

[1] How Do Economists Determine Whether the Economy Is in a Recession?, https://www.whitehouse.gov/cea/written-materials/2022/07/21/how-do-economists-determine-whether-the-economy-is-in-a-recession/