Layoff Gale, 1.1% Growth Rate... Growing Fear of US Economic Recession

Cold Wave in Gyeonggi, Companies Cutting Jobs
Is a Second Half Economic Recession Coming?

# On the 27th (local time), the major U.S. fashion company Gap announced that it had decided to lay off 1,800 employees. This is an additional restructuring following a reduction of 500 employees last September. On the same day, the ride-sharing service company Lyft also decided to restructure more than 1,000 employees. It had cut 700 employees last November but has now increased the scale of layoffs.

This is a glimpse of the economic chill hitting the United States. As companies continue to cut jobs one after another, the preliminary GDP growth rate for the first quarter of this year was recorded at an annualized 1.1%, significantly below market expectations. With corporate investment declining, GDP growth has lost momentum. Combined with persistent inflation and the effects of aggressive interest rate hikes, the outlook for a year-end recession is gaining traction. Recently, former U.S. Treasury Secretary Larry Summers warned, "Inflation cannot be brought back to 2% without a recession."

Economic Chill, Corporate Layoffs

Gap’s interim CEO Bob Martin announced the layoff decision in a statement, saying, "We are taking necessary steps to restructure the company for Gap’s future." The company aims to escape the slump of poor performance through cost-cutting. Gap has posted annual net losses for three consecutive years from 2020 through last year and recorded a net loss of $273 million in the first quarter of this year. Most of the layoffs are confirmed to be senior staff at the San Francisco and New York headquarters and at various stores. As of the end of January, Gap had approximately 95,000 employees.

Lyft’s layoff scale amounts to 26% of its total workforce. Lyft plans to reduce new hiring and eliminate more than 250 open positions. Lyft CEO David Risher said in an internal email, "We will significantly reduce our workforce to overcome difficulties and return to profitability," adding, "This is to create an organization that benefits the company, employees, and drivers alike."

Besides these companies, U.S. cloud service company Dropbox announced layoffs of 500 employees, accounting for 16% of its global workforce. Southwest Airlines said it might reduce hiring this year due to delays in aircraft deliveries from Boeing.

Economic Chill - Layoffs - Recession Vicious Cycle

As the possibility of a recession increases, the wave of corporate layoffs is spreading. While last year’s layoffs were mostly confined to big tech companies in the second half, concerns about a recession are now spreading across the entire industry.

Concerns about a recession are also reflected in economic indicators. The economic growth rate for the first quarter of this year fell to 1.1%. This is far below market expectations (2%) and the previous quarter’s figure (2.6%). The average annual growth rate of the U.S. economy over the decade before the pandemic was 2.2%.

In particular, private companies reducing investment and production have had a significant impact on the overall GDP growth decline. Even consumer spending, which plays a major role in sustaining growth, has slowed, increasing the likelihood of a year-end recession. Jeffrey Roach, chief economist at LPL Financial, said, "The U.S. economy may be at a turning point," adding, "Consumers are becoming increasingly pessimistic about the future and are cutting back on spending."

Interest rate hikes, which began in March last year to curb inflation, are weighing on the overall economy. The U.S. Federal Reserve (Fed) has raised the benchmark interest rate by 4.75 percentage points over the past year.

Concerns about a banking crisis, which weighed on the market after the Silicon Valley Bank (SVB) incident last month, have not yet dissipated. If banking regulations tighten loan requirements and credit tightening occurs, it will inevitably burden consumer spending and the overall economy even more.

Is a Recession Coming in the Second Half?

Larry Summers, former U.S. Treasury Secretary who most accurately predicted the recent inflation phase, recently reiterated the possibility of a U.S. recession.

At the Morningstar Investment Conference held in Chicago on the 26th, he said, "Fiscal stimulus and low interest rates during the pandemic turned the U.S. from a country with 2% inflation to one with 5% inflation," adding, "Inflation cannot be brought back to 2% without a recession." He further stated, "The Federal Reserve acted too late and lost credibility," and "I am not very optimistic about the fight against inflation."

The Fed will decide on the benchmark interest rate at the Federal Open Market Committee (FOMC) meeting scheduled for July 2-3. Former Secretary Summers said the Fed should raise rates by 0.25%.

Economic media CNBC reported, "The GDP report points to fears of stagflation (economic stagnation with rising inflation)," explaining, "Stagflation in the 1970s and 1980s was characterized by low growth, high inflation, and high unemployment. The only factor not currently present is high unemployment," but added, "However, increasing corporate layoffs are causing fear."

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