Tech layoffs the result of ‘magical thinking’ in the industry, professor says

San José State University Professor and Tech Expert Ahmed Banafa and University of Michigan Professor Betsey Stevenson join Yahoo Finance Live to discuss the state of the tech industry, ongoing layoffs across the sector, growth, and the outlook for the tech industry.

Video Transcript

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- The tech industry continues to grab headlines as it undergoes its biggest round of layoffs since the dotcom bubble. But what does this spell out for what's ahead for tech employers and employees this time around? Here to discuss is Ahmed Banafa, San Jose State University professor, along with Betsey Stevenson, University of Michigan Professor and former member of the Council of Economic Advisors. A big welcome to you both.

So, Ahmed, I want to start with you because I know that during the dotcom bubble, that was something that you were a part of. You were part of those layoffs. So in terms of the worst of it, historically, do you think the worst of it is behind us in terms of the layoffs?

AHMED BANAFA: Well, I mean, nobody knows that. I mean, I hope that I have that crystal ball to say that. But what we have seen so far, actually, are big numbers, that we see them from the big companies, tech companies just announcing them. And they're saying that, OK, after that, we're going to be fine. Even for case of Google, the CEO, he said that this is going to help us going forward. Nobody say that we are done with it. What they're saying, this is going to take us through what we expect in 2023.

- And Betsey, I want to ask you, in terms of what we're seeing, obviously, the dotcom bubble, a lot of different factors at play here than we saw-- than we saw then. Talk about some of those factors and what that might spell in terms of perhaps what tech employees might see in this sort of environment.

BETSEY STEVENSON: Well, I think there's a lot of things that are different from the dotcom bubble. Well, let's focus on what we've seen in the tech industry so far in the last few years and why they're pulling back a little bit right now.

For the tech industry, the pandemic was actually a windfall. Every other industry out there struggled and had a really difficult period in 2020 and 2021. But for tech, this was a period of just massive expansion.

All these people who hadn't wanted to shop online all of a sudden were forced to shop online. And Amazon saw a surge of customers. People who hadn't wanted to use social media found it was the only way to stay in touch with people.

So they pulled a lot of new subscribers, new customers, new users forward. People who might have been pushed into adopting in 2023 or 2024 or 2025 all of a sudden felt they had to do it at the start of the pandemic. And I think the magical thinking that can exist in the tech sector and was part of what happened to the dotcom crisis, but that magical thinking made them think, no, it's not that we're pulling customers forward. It's that we've created all these new customers. And that growth is going to continue as far as the eye can see. And they hired for magical thinking.

So what they're having to do right now is readjust for reality. As you've already shown, the layoffs we're seeing here are small compared to not just the hiring they did during 2020 and 2021, but the overhiring that they did relative to where they had been when the pandemic started. So I think we're seeing a readjustment here. And this readjustment makes sense.

And it's going to be helpful to industries that have found it actually hard to hire in this environment, hard to fully recover, and have been looking forward to being able to hire people. So we've just got a little bit of a sectoral readjustment. That can be super painful for the people who lost their jobs. But that is part of our healing from the pandemic.

- Ahmed, I want to ask about the 800-pound gorilla of the tech industry, Apple. I talked about it earlier, about how they were slow as far as their hiring goes. But now we're going into their earnings report next week. We're expecting to see slower iPhone sales. We're expecting to see slower Mac sales. We're expecting some potential problems with services as far as foreign exchange headwinds go.

So at what point does something happen to Apple, if anything? And then what does that do to the broader tech industry? They're a bellwether, right? And if they've been unaffected so far, that's good. But if they start to run into trouble, what does that mean, then, for the rest of the industry?

AHMED BANAFA: Well, that's a very good point. I have a lot of my students, my friends work at Apple. And during the time when this big rush of hiring people, Apple was really slowing down. I mean, their revenue went up by 52%. Their hiring went up by 19% compared to the other tech companies, who really matched their revenue with the rate of hiring.

So if we're looking at Apple-- and it's a purely consumer-based company, which means you and I and other, if you don't buy the iPhone, other product, it's going to impact them directly. They are really related to what we see, what we hear about the inflation, about the possibilities of recession. And they're trying to diverse the sources of their manufacturing by going to India and have something like 25% of their production there and Vietnam to avoid any political or geopolitical problems in the future.

But if the consumers start slowing down-- and there was a report from the fourth quarter that the customers are pulling back on their sending-- on their spending, that could impact Apple. And if Apple starts slowing down and starts laying off people, we might go to a mini version of what happened with or the 2008 because it's actually a leader in this field.

- And, Betsey, I know we talk a lot about the tech layoffs, but, obviously, when we look at the broader economy, how do the layoffs that we're seeing there compared to what we can expect, if we can expect those repercussions in the broader economy, especially when you have some of these high-skilled workers on H-1B visas having this maximum 60-day grace period to try and get another job as well?

BETSEY STEVENSON: So I'm just going to disagree a little bit here because when we look at consumer spending, it's been surprisingly robust. We know it needs to slow down. It was too fast. And that was part of what built up the inflationary pressure.

But it hasn't actually declined. That's what's keeping us out of a recession. It's continuing to grow.

But what happened was consumers gorged themselves on goods. We saw spending on goods that we'd never seen before. And there's only so much stuff people can have. If everybody already has a new iPhone, of course they're going to slow down on buying iPhones.

But you know what they haven't been doing? Getting their hair cut as regularly, going out to dinner as regularly, traveling as regularly. So there's a whole bunch of sectors that would like to see some of the consumer dollars flow back to them.

We are absolutely going to see a contraction in the goods-producing sector. We're going to see contraction in tech, which is mostly services. But I think we're going to continue to see expansions in other parts of the economy. And so the question is whether those expansions will be big enough to offset the losses in the tech sector.

But the tech sector is not the overall economy. In fact, if we look at where most of our job growth and our GDP growth was coming from prior to the pandemic, it's expansion in basic things people need, like health services, education services, and then things people enjoy, like leisure and hospitality services. So all of that stuff is still expanding and I think will continue to expand enough to make up for some of the losses in the tech sector.

- As you point out, yeah, our own friend of the show, Sam Ro, had said how the tech economy, basically, makes up about 2% of total employment, 2.8%. On that, I just want to ask you a really quick about the subscription services that we had seen really blow up during the pandemic. Obviously, Netflix had seen serious share price declines as we rolled through 2022.

I guess when people signed up for all of these things, they started to pull back a little bit postpandemic or, I guess, towards the tail end of 2022. Are we going to continue to see that kind of pullback in 2023? Do we see them go back into subscription services, whether that's Netflix, Hulu, Spotify, things along those lines? Or is this kind of going to just flatten out and then we'll just see a return to normal growth that we had seen before?

AHMED BANAFA: Well, it's part of the general movement here. And this is a very good point about the subscription services because subscription services is one of the best revenue sources for any of the companies in the tech industry. Now, for companies like Netflix and the others, it depends on many factors. One of them is what kind of shows they are offering.

And at the same time, my vision or my projection is that we are going back to some kind of fragmentation in the subscription services for streaming, for the streaming services and for the entertainment. This is away from the cable, which has brought everything together. I see that there will be some kind of bringing those services together. And we have seen some kind of a merger between some of those streaming services. Why? Because they want to combine their bases and offer more shows.

And this is going to be the same thing for the subscriptions. The more you look at it, the more it's going to be more selective for the consumers. They would like to get more for their money.

And now people are leaving their houses. They're going to the theaters. They have other things to do instead of just sitting home, like what happened in the pandemic, and the only option you have is to watch one of those streaming services.

- So a big thank you to our panel there. Ahmed Banafa, a San Jose State University professor, and Betsey Stevenson, University of Michigan professor and former member of the Council of Economic Advisors, thank you for breaking down the nuances here.