"Bubble Collapse and Global Financial Crisis Similarities"...The Dynamics of Recession

The world's largest e-commerce company Amazon's halt of new headquarters construction following massive layoffs has been interpreted as a signal of a full-fledged economic recession. During past global financial crises triggered by the 2001 IT bubble burst and the subprime mortgage crisis in April 2007, respectively, the tightening of the internet/telecommunications and housing markets spread externally, leading to widespread layoffs and an overall economic downturn. Such major recessions have unfolded as crises in one industry sector transferring to others, and this time as well, the crisis that began in the technology and housing markets is expected to spread across the entire industrial sector.

The Relentless Fall of Big Tech and the Shaken Housing Market

The performance decline of U.S. big tech companies shows no end. The worsening results that began in the second half of last year are deepening. Amazon's net income in Q4 last year plunged 98%, barely avoiding a loss. Microsoft (MS) recorded its lowest revenue growth rate in six years, and Alphabet reported four consecutive quarters of net income decline. Even Apple, the once solid market cap leader, could not avoid decreases in revenue and net income compared to the previous year. As a result, the net income of big tech companies included in the S&P 500 index fell 8.4% year-over-year, marking the worst performance since 2009.

The harsh winter for big tech is expected to continue this year. Amazon projected its Q1 sales forecast at $121 billion to $126 billion, below market expectations. MS also set its revenue target at $50.5 billion to $51.5 billion, lower than the market estimate of $52 billion. Brian Olsavsky, Amazon's Chief Financial Officer (CFO), said, "The most concerning part of the performance improvement is that everyone is cutting back on consumption and adjusting budget priorities."

Amid the worsening performance, big tech companies have resorted to additional layoffs and salary cuts to endure. Meta, which cut 11,000 employees at the end of last year, reportedly began laying off thousands more this week. Airbnb also reduced 30% of its recruiting staff this week. According to Layoffs.fyi, which tracks layoffs at global tech companies, 38 tech companies that went public during the pandemic have already started layoffs to reduce costs.

The U.S. housing market is also already significantly shaken. According to the U.S. Department of Commerce, housing construction activity has declined for seven consecutive quarters. Housing prices are also falling rapidly. The S&P CoreLogic Case-Shiller Home Price Index, which measures average home price trends in major U.S. cities, fell 2.7% on a seasonally adjusted basis as of the end of December last year compared to the end of June.

[Image source=AP Yonhap News]

Profit Declines in Nine Sectors... Will the 'Great Recession Equation' Repeat?

The Wall Street Journal (WSJ) forecasted that the equation 'widespread profit decline = economic recession,' which appeared during past great recessions, will repeat this year. According to financial information provider Refinitiv, profits in nine sectors of the S&P 500 index declined in Q4 last year. Only energy and industrials, which benefited from the Ukraine war, experienced profit growth last year. Refinitiv expects profit declines to continue in consumer goods, finance, retail, healthcare, and other sectors in Q1 and Q2 this year.

The biggest threat is the Federal Reserve's (Fed) interest rate hikes. Jerome Powell, Fed Chair, appeared at the Senate Banking Committee hearing to deliver the semiannual monetary policy report and stated, "The terminal rate could be higher than expected," signaling further tightening. This remark hinted at the possibility of a 0.5 percentage point rate hike, a 'big step,' at the Federal Open Market Committee (FOMC) meeting scheduled for March 21-22.

Since starting the rate hike cycle in March last year, the Fed has raised the U.S. benchmark interest rate to 4.5-4.75%, the highest since 2007. At the December FOMC meeting last year, the Fed projected a terminal rate of 5.1%. If Chair Powell's statement holds true and the terminal rate rises above this, it means rates could surge to the mid-5% range this year. The market expects the rate hike trend to continue this year. U.S. major investment bank Goldman Sachs even presented a scenario where the terminal rate reaches 6%.

[Image source=Reuters Yonhap News]

As high-intensity tightening continues, the market's conviction in predicting a recession is increasing. In a survey conducted last month by the U.S. Census Bureau targeting 20,000 companies across 19 industries nationwide, the number of companies reporting that business conditions are excellent or above average has been declining since July last year. WSJ predicted that additional layoffs by companies responding to profit declines and reduced consumer spending could lead to a recession this year.

It also pointed out that the increasing number of companies facing liquidity crises due to interest rate hikes is acting as a trigger for the U.S. economy. Credit rating agency Moody's warned that due to continuous rate hikes, companies across all industries will face difficulties repaying maturing debts over the next 12 to 18 months. It particularly expects six sectors?retail, automotive, transportation, chemicals, mining, and forestry?to be vulnerable. Compared to last year, when only one sector was expected to be vulnerable, the economic outlook has significantly worsened.

Moody's stated, "These six sectors have shown weaker performance in economic recovery compared to other sectors, and their credit fundamentals are deteriorating. As maturities come due, refinancing with new loans will be more costly and difficult to execute," warning that they could face bankruptcy risks.

This content was produced with the assistance of AI translation services.