The pain in the tech industry is starting to hit the rest of us.

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Weeks of grim news have made it clear that we are entering a new phase of the tech recession, with corporate woes resurging across the industry and spilling over into the broader economy.

There are several reasons why we expect the damage to get worse.

Amazon.comS

Earlier this month, a $2.5 billion construction project in suburban Virginia decided to delay the next phase. Facebook-parent Meta Platforms recently announced that it will cut 10,000 jobs, up from the 11,000 it cut in November. A national crisis of confidence in the banking system caused by the collapse of Silicon Valley Bank. These events show how systemic weakness in large areas of the technology economy – retail, advertising, startups and investment capital – has begun to spread outward from the companies most affected by them.

Meta CEO Mark Zuckerberg said Tuesday, “At this point, I think we have to prepare ourselves for this new economic reality to continue for many years.

Mr. Zuckerberg cited higher interest rates, geopolitical uncertainty and increased regulation as challenges. I didn’t mention the technology industry.

The collapse of Silicon Valley Bank is a perfect example of this phenomenon, in a three-act mini-game.

In the first act we see how technology is especially sensitive to wider situations. In the second, how much a problem in one industrial unit can spin the rest. In the denouement, we witness the way this concentrated problem spills out into the wider world.

The opening of Silicon Valley banking began as interest rates rose, “free money” closed in, and investment in startups fell. As a result, investors and companies have withdrawn their accounts from the bank. The demolition of this 40-year-old institution has now been revealed to be an inside job, driven by startups and investors who had previously worked so hard.

As the crisis spread to other smaller and regional banks, the government stepped in and announced that all SVB depositors would get their money back. Still, that hasn’t entirely calmed markets and investors. Witness Wednesday’s spike in the market for government securities, long considered among the world’s safest assets.

The economic engine based on the tech industry that fueled the global economy in the process – making every dollar invested look like a buck and a half – is doing the opposite.

Workers at the construction site of Amazon’s second headquarters in Arlington, Va. Earlier this month, Amazon announced that construction would halt on its second outpost.


Photo:

Amanda Andrade-Rhodes for the Wall Street Journal

Too much influence of tech

It’s not all bad news. The tech-heavy Nasdaq Composite Index has gained about 15% from its low point in October last year, and some stocks have fared even better. Meta’s stock is up nearly 122%, though it’s still miles below its all-time high set in 2021.

That said, part of investor enthusiasm stems from similar spending cuts and layoffs that are not good for the broader economy.

The information-technology industry directly accounts for more than 10% of the U.S. economy, and about 8% of all jobs, according to the Commerce Department. The Information Technology and Innovation Foundation, a Washington-based think tank backed by tech companies, says the industry accounts for one in five jobs in America when technology-supporting roles are included.

Amazon’s second headquarters, launched after a nationwide business beauty contest that showcased the technology’s expanding economic value, has been hailed as a boon to the Arlington, Va., economy. The full benefits may come eventually, but residents will have to wait.

“Never let an opportunity pass for a good, thoughtful change.”


– Francesco Barosi, Alix Partners

Meta is cutting nearly a quarter of its workforce at the end of September, returning to 2021 staffing levels. Many of these cuts are hitting workers across the nation for the past several years in a dispersed workforce — meaning the effects aren’t just concentrated on the coasts.

Francesco Barosi, head of the technology, media and telecommunications practice at consulting firm Alix Partners, says nearly all the CEOs and CFOs he advises are considering layoffs. The two biggest reasons are the economy, and while CEOs like Mr. Zuckerberg and Amazon’s Andy Jassy are shedding their workforces, other leaders need no excuse to do the same.

“Never pass up an opportunity to change for the better and for the better,” he says.

Amazon’s campus in Seattle, March 2020, after the company asked employees to work from home for the rest of the month.


Photo:

Lindsey Wasson / Reuters

Potential melting

In his book “Ordinary Hazards: Living with High-Risk Technologies,” Yale sociologist Charles Perot explains how something like the 1979 Three Mile Island meltdown could happen and then become the largest nuclear disaster in history. He recognized that any sufficiently complex system with tightly coupled elements is particularly prone to catastrophic failure. A lot can go wrong, and when something works, it happens quickly.

Dr. Perrow’s description of the dangers of complex and relatively untested technologies applies to the US financial system in the lead-up to the 2007-2008 financial crisis or today to the tightly-knit web of technology companies large and small. These companies aren’t just competitors, they’ve been constantly imitating each other for years, hiring each other’s talent, buying startups, and enabling each other’s business models either directly or indirectly.

Announced the release of the tech-industry, every quarter

A clear example of this kind of interdependence is the way of Apple,

Meta says it’s making a shift that will allow users to monetize Facebook and Instagram from data collection, generating more than $10 billion in revenue by 2022 alone.

Another example is the way technology companies rely on cloud services from Amazon, Microsoft and Google. As companies pare back spending on cloud-based software, revenue growth has slowed for companies that offer cloud-based tools like Salesforce and cloud service providers like Microsoft.

They are just as other companies are following the lead of big tech companies in downsizing their workforces. They can cut costs on items like services and software. If a company wants to cut $200 million in payroll and benefits, says AlixPartners’ Mr. Barosi, he recommends cutting the same amount it spends on third-party services.

Downtown San Francisco as businesses struggle to recover since the Covid-19 pandemic.


Photo:

Shelby Knowles for the Wall Street Journal

Remote work, layoffs and the failure of the microchip

A related dependency is the rise of remote work. It would be impossible without the mass adoption of countless cloud-based and remote collaboration tools. There’s some irony in the fact that Amazon is the world’s largest provider of cloud computing infrastructure, which makes everything from Zoom to Slack possible, and that the remote work enabled by those tools is one of the reasons Amazon has paused work on its second headquarters.

The rise of remote work has had a devastating effect on small businesses in the city, such as restaurants. These effects are likely to increase as tech companies lay off more workers.

Similar negative feedback mechanisms are at play in the microchip industry. The unprecedented decline in microchip demand over the past nine months appears to be mainly because people bought more devices during the pandemic and haven’t updated since. But in the future, as tech companies and other corporations stop hiring or downsize, spending on personal computers and the cloud services they provide will also decrease.

You can’t build a “cloud” without the racks and shelves of computers called servers and the microchips inside them. The $53 billion Chips Act, which is intended to restore American competitiveness in the chip industry, could mean delays despite generous subsidies. Intel and others have pledged to build a domestic microchip manufacturing infrastructure.

Customers shop at an Apple store in New York on Black Friday 2022.


Photo:

Julia Nickinson / Associated Press

Options for beginners narrow

Meanwhile, the pain for tech startups that caused Silicon Valley’s bank failure may be just beginning. Many startups are self-supporting with the money they raised during the boom times to invest in ventures. Raising more money in the near future will be difficult, if not impossible. In the year In the last quarter of 2022, fundraising by venture-capital firms hit a nine-year low and was down 65 percent from the same period in 2021.

According to investor Adam Struck, founder of Struck Capital, some companies are turning to “venture debt” when they can’t raise another round of capital.

One problem with this strategy: Silicon Valley Bank, an institution that provides debt to startup ventures, has just imploded. While the new management is trying to keep the business going, there is still a chance it could be sold to a buyer and restructured into its original form. Late last week, some of the country’s biggest banks put up $30 billion to bail out First Republic Bank.,

Another common source of debt after stock prices fall.

“Having Silicon Valley Bank provide venture debt for companies to move forward was a big part of the startup business,” says Mr. Struck. “I have to hope that the free market will step up, but I’m not sure who that will be. Almost all of the startups they invested in had accounts at Silicon Valley banks, and no tech startup is sure where to go to get debt financing.

If, like the first nuclear power plants, a complex and tightly-knit system, such as the tech industry, is not as resilient to a fallout as first assumed, the crisis could move quickly and spread far and wide.

Write to Christopher Mims at christopher.mims@wsj.com

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