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What Do Bay Area Layoffs Really Mean for the Local Economy?

While they are disruptive for the lives of the affected workers, experts and economists argue that the layoffs don’t necessarily foreshadow economic collapse as the classic indicators of recession haven’t happened yet.

San Francisco's downtown skyline, capped by the 61-story Salesforce Tower, catches the final warm rays of a winter sunset, Tuesday, Jan. 11, 2022.
(Karl Mondon/Bay Area News Group/TNS)
(TNS) — Each day seems to bring news of another set of tech layoffs. But with so many of those companies still concentrated in California's Bay Area, what does the cavalcade of job cuts actually say about the regional economy?

Economists and experts said while the layoffs are disruptive for the lives of the affected people, they don't necessarily foreshadow an economic collapse like the dot-com bust of the late 1990s or the housing crisis of the late 2000s.

The classic indicators of a severe economic storm are job numbers turning negative while unemployment rates spike. But that isn't happening, at least not yet, on the local, state or national level, said Stephen Levy, the director and Senior Economist at the Center for Continuing Study of the California Economy.

"So far, the job growth is positive and the unemployment rates are really very low, although that could change in the near term," Levy said.

While the headlines are filled with reports of layoffs, including Salesforce, San Francisco's largest private employer, cutting 10 percent of its workforce, Levy said the region for the time being is experiencing, "a very mild downturn."

Many companies who bulked up staffing levels during the pandemic are also cutting back staff they no longer need. Levy pointed to Salesforce as an example. The company said they had 49,000 employees at the beginning of 2020 and 80,000 before the cuts, "So if they cut 10,000 they will still be 21,000 over pre-pandemic levels," Levy said in an email.

Comparing previous economic busts and their impact on employment rates in San Francisco over time also sheds some light on the severity of the current downturn.

New data from the city's chamber of commerce shows that almost three years from the start of the pandemic — about 34 months based on the most recent data available — the unemployment rate is about 1 percent below where it stood pre-COVID.

After the same amount of time had elapsed from the beginning of the 2007-08 financial crisis, the city's unemployment rate stood about 1.5 percent below where it had before the collapse. Both levels showed a more robust recovery than the 9 percent drop in the employment rate in the city almost three years after the dot-com bust.

Still, the larger economic horizon seems to darken by the day as companies cut employees and spending, and many tech startups find it harder to raise the money they need to launch, or give themselves a bit more runway.

The World Bank has warned the global economy could teeter into a recession this year, revising its growth estimates down to 1.7 percent, almost half of the previous 3 percent growth it predicted in June.

While 2022 saw fewer IPOs and more down or canceled funding rounds, San Francisco still led the pack nationally with venture capital-backed company funding, San Francisco Chamber of Commerce data show.

The city saw an infusion of more than $40 billion last year from venture backed funding, followed by New York City with $38 billion. Silicon Valley came in fourth with $18 billion while the East Bay came in ninth place with $730 million in funding.

Despite those eye-popping numbers from last year, "Venture investors are a lot more conservative" these days, said Sean Randolph, an economist and the senior director of the Bay Area Council Economic Institute.

"As the large companies scale back their spending, that affects the market for the startups," Randolph said. "It's getting harder and harder."

And while layoffs in the tech sector are not the only indicators of the region's economic health, the Bay Area is so dependent on the industry as an economic engine that, "If tech gets a cold at the end of the day, the entire economy is affected," Randolph said.

Also complicating the economic temperature-taking is the fact that it's difficult to tell what parts of any slowdown are due to the economic hangover from the pandemic, and which are not, Randolph said.

Some indicators, like office occupancy and rental vacancies, almost certainly are.

Office vacancies in San Francisco stood at about 6 percent in the first quarter of 2020 before the pandemic effects were fully felt, according to data from real estate company JLL, compiled by the San Francisco Chamber of Commerce. That number stood at nearly a quarter of available office space in the city in the third quarter of last year.

Office occupancy still stands at about 40 percent of pre-pandemic levels in the city, a number that is lower than many other major metropolitan areas around the country. That is also dragging down other downtown businesses that rely on foot traffic.

Those grim numbers have been around for sometime, however, and economists like Levy said one key indicator remained hopeful: "There are still more job openings than people getting laid off," in California and nationally.

To an economist, a worrisome trend would be job cuts leading to income losses leading to income cuts and reductions in spending for individuals and households, Levy said. That hasn't happened, yet.

(c)2023 the San Francisco Chronicle. Distributed by Tribune Content Agency, LLC.
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