The Federal Reserve’s ongoing attempts to stuff the inflation genie back in its bottle will slowly trickle down into the jobs market and trigger a recession before the year is out, warns J.P. Morgan.
The Wall Street bank’s chief U.S. economist Michael Feroli expects the Fed is prepared to stifle growth and destroy demand in order to ensure expectations of continued price increases in the medium term do not take root among American businesses and consumers.
“I don’t think it’s going to be a very happy year,” he told Bloomberg TV. “We are expecting the economy to slip into recession by the end of the year just due to the lag effect of the tightening in financial conditions that the Fed has engineered here as well as the additional rate hikes they’re signaling.”
Last year the Fed went from stoking inflation through zero interest rates and monthly bond market purchases at the start of 2022, to eventually hiking rates by 75 basis points at four consecutive policy meetings.
Eventually, Fed chair Jay Powell brought the Fed funds rate to a full 4.5% in order to clamp down on 9%-plus inflation rates.
In the process, risk assets crashed with the S&P 500 shedding nearly a fifth of its value, its worst performance since the 2008 global financial crisis, while unregulated crypto coins and tokens took a nosedive along with their digital collectible cousins, NFTs.
Investors are hoping to see the Fed finally pivot from applying brakes to the economy to stepping back on the accelerator by cutting rates.
That’s because many have been conditioned to think the Fed will always be there to bail them out ever since Alan Greenspan took over as Fed chair from inflation slayer Paul Volcker in the early 1980s.
The so-called “Greenspan put” counteracted persistent stagnant wage growth by making Americans feel wealthier by inflating the value of their assets—stocks, bonds, and real estate.
Overheating economy
As long as globalization and offshoring kept a lid on pricing pressure, the strategy of adding more and more stimulus worked. But it encouraged leveraged one-sided bets by speculators that lead to the creation of the 2000 dotcom bubble, the 2006 housing bubble, and finally the 2020 “stonks” bubble.
The COVID pandemic’s effect on just-in-time global supply chains combined with Russia’s war in Ukraine however sparked a return in inflation to levels not seen since the 1970s, and that’s why Feroli believes maneuvering room this time is minimal.
The J.P. Morgan economist forecasts U.S. consumer price rises will not return towards the Fed’s 2% target rate until probably the earlier part of next year.
“Just given the severity of the inflation problem that we’re dealing with, they realize the risk of over-tightening here is just something they have to swallow and stomach because the risk of unanchoring inflation expectations is still there,” he explained. “I think the message you got here today is more hikes are coming.”
Not only are they coming, but Feroli believes the Fed will hold rates at their ultimate peak for possibly a full year. Powell’s chief concern is a vicious circle of spiraling inflation leading to rising wage demands that feed through to yet higher prices.
To break that negative feedback loop, he needs to anchor inflation expectations firmly in place by dousing an overheated U.S. economy with cold water.
“We still have industrial production near the highs of the cycle we still have home construction near the highs of the cycle, so we really haven’t seen the effects of higher mortgage rates, of a stronger dollar really hit,” Feroli explained.
“The labor market hasn’t cooled in a convincing way and wage growth remains pretty strong.”
E-commerce giant Amazon and business software maker Salesforce are the latest U.S. technology companies to announce major job cuts as they prune payrolls that rapidly expanded during the pandemic lockdown.
Amazon said Wednesday that it will be cutting about 18,000 positions. It’s the largest set of layoffs in the Seattle-based company’s history, although just a fraction of its 1.5 million global workforces.
“Amazon has weathered uncertain and difficult economies in the past, and we will continue to do so,” CEO Andy Jassy said in a note to employees that the company made public. “These changes will help us pursue our long-term opportunities with a stronger cost structure.”
He said the layoffs will mostly impact the company’s brick-and-mortar stores, which include Amazon Fresh and Amazon Go, and its PXT organizations, which handle human resources and other functions.
In November, Jassy told staff that layoffs were coming due to the economic landscape and the company’s rapid hiring in the last several years. Wednesday’s announcement included earlier job cuts that had not been numbered. The company had also offered voluntary buyouts and has been cutting costs in other areas of its sprawling business.
Salesforce, meanwhile, said it is laying off about 8,000 employees, or 10% of its workforce.
The cuts announced Wednesday are by far the largest in the 23-year history of a San Francisco company founded by former Oracle executive Marc Benioff. Benioff pioneered the method of leasing software services to internet-connected devices — a concept now known as “cloud computing.”
The layoffs are being made on the heels of a shake-up in Salesforce’s top ranks. Benioff’s hand-picked co-CEO Bret Taylor, who also was Twitter’s chairman at the time of its tortuous $44 billion sale to billionaire Elon Musk, left Salesforce. Then, Slack co-founder Stewart Butterfield left. Salesforce bought Slack two years ago for nearly $28 billion.
Salesforce workers who lose their jobs will receive nearly five months of pay, health insurance, career resources, and other benefits, according to the company. Amazon said it is also offering a separation payment, transitional health insurance benefits, and job placement support.
Benioff, now the sole chief executive at Salesforce, told employees in a letter that he blamed himself for the layoffs after continuing to hire aggressively into the pandemic, with millions of Americans working from home and demand for the company’s technology surging.
“As our revenue accelerated through the pandemic, we hired too many people leading into this economic downturn we’re now facing, and I take responsibility for that,” Benioff wrote.
Salesforce employed about 49,000 people in January 2020 just before the pandemic struck. Salesforce’s workforce today is still 50% larger than it was before the pandemic.
Meta Platforms CEO Mark Zuckerberg also acknowledged he misread the revenue gains that the owner of Facebook and Instagram was reaping during the pandemic when he announced in November that his company would be laying off 11,000 employees, or 13% of its workforce.
Like other major tech companies, Salesforce’s recent comedown from the heady days of the pandemic have taken a major toll on its stock. Before Wednesday’s announcement, shares had plunged more 50% from their peak close to $310 in November 2021. The shares gained nearly 4% Wednesday to close at $139.59.
“This is a smart poker move by Benioff to preserve margins in an uncertain backdrop as the company clearly overbuilt out its organization over the past few years along with the rest of the tech sector with a slowdown now on the horizon,” Wedbush analyst Dan Ives wrote.
Salesforce also said Wednesday that it will be closing some of its offices, but didn’t include locations. The company’s 61-story headquarters is a prominent feature of the San Francisco skyline and a symbol of tech’s importance to the city since its completion in 2018.
Bosses at the U.K.’s biggest companies have already earned the equivalent of Britain’s median annual salary this year, according to new research, with top CEOs raking in tens of thousands of pounds before the third working day of 2023 is out.
According to calculations published on Thursday by the High Pay Centre, a London-based thinktank that campaigns for pay equality, median CEO pay at FTSE 100 firms—based on an analysis of the most recent CEO pay disclosures and government wage statistics—currently stands at £3.41 million ($4.1 million).
That’s 103 times the median full-time worker’s annual pay of £33,000 ($39,620).
London’s FTSE 100 index is comprised of the largest London-listed companies by market capitalization, including Rio Tinto, HSBC, Vodafone, and Shell.
Thursday’s report also found that while median FTSE 100 CEO pay has increased 39% since January last year, the median worker’s pay has risen by 6% over the same period. The U.K.’s most recent annual inflation reading, for November, was 10.7%, with the consumer price index hovering above or near 10% for much of 2022.
The High Pay Centre’s findings mean that by 2 p.m. London time (9 a.m. ET) on Thursday, the median CEO’s earnings will surpass the median annual salary for a U.K. full-time worker.
As Jan. 2 was a public holiday, that means the marker will have been reached before the end of Britain’s third working day of 2023.
This year, the milestone will be reached nine working hours earlier than it was in 2022, according to the organization’s analysis.
The phenomenon isn’t limited to Britain.
Bosses at France’s most valuable public companies are also set to earn an average French employee’s annual salary by Thursday, according to Oxfam, while chief executives in countries from the U.S. to Sweden also earn an average worker’s yearly income in a matter of days.
In the U.K., it isn’t just CEOs who are set to make the median annual salary in a matter of days this year, the High Pay Centre’s report showed.
Partners at London’s most prestigious law firms, whose median salary rang in at £1.95 million ($2.3 million), would have earned £33,000 by Jan. 9, the thinktank said, while top bankers at one of the five banks on the FTSE 100 would have achieved the feat by Jan. 17.
Cost-of-living crisis
While inflation has plagued many western states, Britain has been hit particularly hard—and economists widely believe that things are only going to get worse for the U.K., warning that the country will experience a “deeper and more prolonged recession” than any other G7 nation.
The U.K. is currently embroiled in its worst cost-of-living crisis for decades, with inflation hitting 41-year highs last year while a shrinking economy saw the country end 2022 teetering on the brink of a recession.
Alongside an ongoing energy crisis that has seen millions of households around the U.K. plunged into “fuel poverty,” the country’s food price inflation hit a record high at the end of 2022 while real wages declined at a record rate as inflation continued to bite into Britons’ purchasing power.
The ongoing squeeze has led to widespread labor strikes across the country, with train and bus drivers, teachers, driving test examiners, nurses, and ambulance drivers set to go on strike in various parts of the U.K. in January, following weeks of union action at the end of 2022.
‘Little public support for high CEO pay
In a statement on Thursday, the High Pay Centre’s Director Luke Hildyard said measures needed to be implemented to balance income distribution more evenly so that declining living standards in Britain could be addressed.
“In the worst economic circumstances that most people can remember, it is difficult to believe that a handful of top earners are still raking in such extraordinary amounts of money,” he said.
“The U.K. economy really cannot afford for such a big share of the wealth that is created by all workers to be captured by such a tiny number of people at the top.”
Meanwhile, Jo Wittams, co-executive director of British charity the Equality Trust, told Fortune on Thursday that her organization’s research showed that 70% of Brits support government regulation of CEO pay.
“It would be easy to portray this as a reward for hard work, but these rewards are not equitably balanced. CEOs and shareholders are reaping the benefits of record profits, while workers are urged to take real-terms pay cuts, despite increased productivity,” she said.
“Companies must be aware of the broader economic context in which they operate—recognizing that with decades of wage stagnation for workers coupled with inflation reaching a 40-year high, there is little public support for ever-increasing executive pay.”