2024 got off to a bad start for an estimated 82,300 US workers who were laid off when they returned to work after the festive season, according to data from Challenger, Gray & Christmas. Just a few examples of the companies across industries that downsized their workforces include the likes of American Airlines, Amazon, eBay, Levi Strauss, Microsoft, PayPal, Salesforce, and UPS.
These January layoffs come after US companies shed around 305,000 employees in 2023. Counterintuitively, companies are making these cuts while the stock markets are performing well, interest rates are expected to start gliding down later in the year, and many companies—including members of the Magnificent Seven—are reporting results that range from solid to stellar, a few of which are summarised in our Global section below.
So, what’s going on? One point from Challenger is that layoffs in January 2024 are lower than the 103,000 jobs lost in the same month last year. They are also considerably lower than the record 242,000 jobs cut at the height of the global financial crisis in January 2009. In some respects, following hiring sprees during COVID-19, some companies are simply rightsizing their workforces again.
Indeed, economists and the Fed have seen resilience of the US labour market during and after the pandemic as a flashing red light for inflation. Even amid the layoffs, the US Labour Department announced earlier today that 353,000 net jobs had been created in January, following a gain of 216,000 jobs in December. With unemployment expected to touch just 3.8%, it could be argued that the jobs market is actually buoyant.
In other cases, companies are looking to eliminate redundant positions following mergers and acquisitions, as is the case with Microsoft trimming headcount in its gaming division following the acquisition of Activision Blizzard. Elsewhere, companies are expecting to be able to chop overheads because they can automate more processes with artificial intelligence (AI).
That said, Challenger found that AI was cited for only 381 job cuts in January and just 4,628 job cuts since May 2023. “Restructuring” was the most-cited reason for job cuts followed by plant, store and unit “closing”. In effect, because US companies are shareholder-centric, they are on a constant drive to improve efficiencies.
Technology companies, especially, are acting before cost or revenue pressures show on their bottom line, rather than reacting only when bad times unfold. As earnings reports from Meta and Amazon showed this week, reducing the size of the workforce can give a significant boost to both the bottom line and the share price.
While layoffs have a detrimental effect on workers’ lives, the cycles of hiring and cutbacks are an inherent feature of the ‘creative destruction’ that powers the US economy. The relentless American drive to optimise and innovate makes workers more productive, creates wealth, and, over time, improves standards of living across the board.
“Creative Destruction is the essential fact about capitalism.”
– Joseph A. Schumpeter, Political economist
Global News
- The Fed held interest rates steady for a fourth straight meeting and indicated it was open to cutting them, though Fed Chair Jerome Powell threw cold water on investors’ hopes that reductions would begin in March. The Federal Open Market Committee, which sets monetary policy, signalled a cautious approach to rate reductions emphasising that it does not foresee lowering the target range until it has greater confidence in inflation’s sustained movement to 2%.
- The International Monetary Fund says the global economy will grow 3.1% this year, up from an October prediction of 2.9%. This is due to better-than-expected expansion in the US and fiscal stimulus in China. It has, however, warned of risks from wars and inflation. In its World Economic Outlook, it kept its 2025 forecast unchanged at 3.2%.
- US consumer confidence increased to 114.8 in January from a revised 108 a month earlier to the highest level since the end of 2021. This matched the median estimate in a Bloomberg survey. Americans are more upbeat about the economy and the job market amid more sanguine views about inflation.
- The US is pulling ahead of the economic race with China with the economy outpacing Wall Street’s expectations, markets flourishing and inflation nearing the Federal Reserve’s target. This suggests the potential for a controlled economic trajectory, avoiding recession. Conversely, China is grappling with economic challenges, including stagnant markets, declining consumer confidence, slowing growth, and a shrinking population. Recent weeks have witnessed intensified efforts by Chinese policymakers to stimulate the economy and stabilise markets. Measures include providing long-term liquidity to banks, tightening regulations on short selling, and expanding access to loans for developers.
- Eurozone economic output grew at 0% in the last three months of 2023 versus the previous quarter, after contracting in the third quarter, narrowly avoiding a recession. Compared with a year earlier, the eurozone grew just 0.1 percent. The anaemic pace is keeping Europe far behind the United States, where the economy, although slowing from a breakneck growth pace, continues to be powered by consumer spending.
- The Bank of England has indicated that there may be interest-rate cuts, the first such suggestion since COVID-19. While warning that price pressures will remain, it affirmed predictions that inflation will fall to target in the UK’s spring. The nine-member Monetary Policy Committee split three ways on how to act in the latest rates decision, with most of the six opting to leave the key rate unchanged at 5.25%.
- China Evergrande Group is set to be liquidated after an order from a Hong Kong court on Monday, which has set off a daunting process to carve up one of the biggest casualties of a property crisis that’s upending the world’s second-largest economy. Evergrande has more than $300 billion in liabilities. Trade in its shares was halted and the stock was down more than 99% from its peak. Its liquidation is a big test for international creditors as questions hang over what will happen with the company in terms of mainland China.
- Amid a wave of workforce reductions, Deutsche Bank intends to trim 3,500 positions in the upcoming years as CEO Christian Sewing aims to bolster profitability. UPS will eliminate 12,000 managerial roles to enhance productivity, while PayPal plans to reduce its workforce by 2,500 to fortify its competitive stance amidst growing market competition. Additionally, iRobot disclosed intentions to terminate 31% of its employees as it’s estimated $1.7 billion acquisition deal with Amazon has been called off.
- Several Wall Street banks including JPMorgan Chase & Company and Bank of America are in talks to provide as much as $8 billion in financing for a buyout of electronic signature company DocuSign, according to sources. This would be the largest leveraged buyout of the year so far. The deal would value the company at $13 billion.
- The following six companies, which are all held in our preferred actively managed portfolios, as well as being significant constituents of the MSCI World Index, provided performance updates this week:
- Meta Platforms posted a 25% gain in sales while profits tripled, as well as projecting revenue growth for the current period that surpassed projections in its fourth quarter results. After seeing business shrink for the first time in 2022, Zuckerberg made efforts to turn the company around, dubbing 2023 the “year of efficiency” and cutting over 20,000 thousand jobs in four rounds of layoffs. The stock is up 2.95% this week and 11.5% in 2024, after tripling in value in 2023.
- Microsoft posted its strongest revenue growth since 2022 on Wednesday, spurred by interest in new AI products that in turn are driving renewed spending on cloud computing. The share price is flat this week, but is up 7.4% in 2024, sending its stock market value above $3 trillion and unseating Apple as the world’s most valuable company.
- Apple reported a deepening slump in China during the holiday quarter, with sales coming in at below analysts’ estimates. This is despite total iPhone sales being stronger than expected and the company returning to revenue growth. This was Apple’s weakest December quarter in the Asian nation since the first period of 2020. The share price is down 2.9% for the week.
- Alphabet reported fourth-quarter revenue from its core search advertising business that fell short of analysts’ estimates, overshadowing an otherwise strong end to the year. Although sales, excluding partner payouts, jumped 15% to $72.3 billion, ahead of analysts’ estimates, revenue in Alphabet’s core search business was $48 billion, narrowly missing expectations of $48.15 billion. The share price is down 7.2% this week.
- Amazon.com stock gained 8% after the market close following its statement that it has seen strong sales in the fourth quarter. It also gave an operating income outlook that surpassed estimates, suggesting that Chief Executive Officer Andy Jassy’s unrelenting cost-cutting and focus on services that make money is reshaping the once free-spending company. The online behemoth will continue with the job cutting after letting go of 35,000 jobs last year. The share price is flat for the week, but up 4.8% in 2024.
- Novo Nordisk became the second-ever European company to pass $500 billion in market value, bolstered by an upbeat outlook for its blockbuster obesity drugs, Wegovy and Ozempic. Novo crossed the milestone on Wednesday, reaching a level only attained by Dior owner LVMH, as its shares extended recent gains. However, the century-long competition between pharmaceutical giants Eli Lilly and Novo Nordisk shows no signs of slowing down. Eli Lilly’s new weight loss drug, Zepbound, is poised to outperform Novo’s offerings, and may propel them to even greater market dominance in the next decade. Novo’s share price is up 7.8% this week, 13% in 2024, and gained 67% in 2023
- As at Thursday’s close the S&P 500 was 0.3% for the week.
Local News
- In its latest World Economic Outlook, the International Monetary Fund almost halved South Africa’s growth forecast to just 1% for 2024 — and called for the country to implement reforms and lower its budget deficit. The downgraded outlook was mostly due to logistical challenges, the debt burden, and high borrowing costs.
- South Africa has regressed on Transparency International’s international index tracking perceptions of corruption in the public sector, stumbling into the category of flawed democracies and just one level above non-functioning regimes. The country regressed from a score of 43 in 2022, mustering 41 in 2023.
- What is interesting ahead of the elections, as Marianne Merten writes for Daily Maverick, is that, despite a miscellany of debacles, no government minister has yet been sacked for non-performance. As a result, unclear language and vague goals make it hard to judge government leaders by the performance agreements they sign.
- Alexander Parker, regular BusinessLIVE columnist, writes that South Africa is not prepared for the possibility of another Trump presidency, especially as Trump is difficult to predict and contradictory. There is, he says, a risk that the country may lose its preferential export status, as well as many other benefits, because of “geopolitical grandstanding” such as on the current ongoing wars in Eastern Europe and the Middle East.
- Ahead of the elections, President Cyril Ramaphosa is likely to sign-off on a controversial health insurance bill. This is according to Khumbudzo Ntshavheni, a minister in the presidency, who said it was important it was inked so that full implementation can take place under the new administration.
- The ANC has cut ties with former president Jacob Zuma for defecting to a breakaway party, MK, which claims to be the true heir to the party’s armed struggle against apartheid. Cutting ties with Zuma is a bold move that could pose a serious threat to the ruling party’s dominance in KwaZulu-Natal and his suspension probably signals the end of the former president’s remaining political power within the party. Regular BusinessLIVE columnist, Tom Eaton, argues that Zuma’s party is all aimed at his liberation as the former president seeks to avoid jail time and financial hardship.
- Private sector credit for December expanded the most since July last year, which beat market forecasts. As the full impact of the Reserve Bank’s interest rate hikes have yet to filter through the economy, economists warn the high-cost environment will continue to weigh on growth prospects. This is set to put pressure on the government in the lead-up to general elections later this year as households remain constrained by high levels of debt and a weak jobs market.
- Asset manager Coronation is taking its fight with the South African Revenue Service (SARS) to the Constitutional Court, holding firm that all but two of the JSE’s 50 biggest companies stand to have their global competitiveness eroded should SARS be successful in its bid. SARS argues that an Irish subsidiary is liable for local taxes of R716 million. The Supreme Court of Appeal had agreed with SARS.
- French entertainment giant Canal+ has made a buyout offer for MultiChoice in a R46 billion deal that will test the country’s, and the de facto African, pay-TV monopoly’s own rules on foreign ownership and control of the media. The deal could face regulatory and internal pushback because foreign voting rights are limited to 20%.
- South Africa’s biggest steel maker, ArcelorMittal SA, has cautioned shareholders to expect a loss far exceeding its market value in 2023, as a pickup in demand failed to materialise. The steel company has been battered by weak demand, high levels of imports, logistics dysfunction, as well as load shedding. The group says it also expects to make an announcement soon on the possible closure of its heavy steel operations.
- Transaction Capital aims to pursue the unbundling of WeBuyCars by listing the used-car seller separately on the JSE. Transaction Capital owns 75% of WeBuyCars, and the listing will separate a profitable asset from its holding company that holds the heavily indebted SA Taxi division, which is in serious risk of a debt default.
- As at the time of writing the rand was 0.2% weaker for the week and the ALSI was 0.7% down for the week.
Sources: Dynasty, TechCentral, BusinessLIVE, News24, Bloomberg, CNN, New York Times, Daily Maverick, etc.
