The Unique World of the Tech Recession

leighklotz, CC BY 2.0 , via Wikimedia Commons

The United States is clearly in the midst of a tech recession. All of the signs from classical recessions are now evident. There have been months of missed earnings reports and mass layoffs. Trends have shifted against some of the leading fads of the industry, resulting in catastrophic losses for crypto and its related companies. Like Victor Lustig in the 1930s or Bernie Madoff in 2008 for the wider economy, there are fraudsters whose greed and duplicity helped inflate assets throughout the tech sector.

The last signal for a sector-wide recession appeared last Friday when Silicon Valley Bank (SVB), a mid-sized bank that dominated the business for start-up tech companies for forty years, collapsed and was taken over by the federal government. The failure of SVB led to another bank closure, this time at Signature Bank. Panicked investors pushed the federal government to intervene. On Monday, the federal government announced that it would help make depositors whole past the limits established by law at the FDIC. Fears of a widespread banking crisis have dimmed somewhat ever since, but it is clear that the greater technology sector is on shaky economic ground.

The omens of a tech recession have led to uncomfortable parallels with the 2001 dot-com collapse. At that time, a substantial number of tech companies collapsed and either went out of business or lost much of their value. The NASDAQ dropped by more than fifty percent in a nine-month period. Substantial losses ended up hampering innovation and forcing companies to pursue entirely new business models.

But there is no direct evidence that this drop-off will be anywhere near as bad as the dot-com bust. For example, the issues that precipitated these two banking failures are not as systemic as those facing technology companies in 2001. Back then, a substantial portion of the technology sector were little more than paper companies and could gain valuations with an idea and a simple website. The crypto bubble was a smaller percentage of the tech sector than the large swath of companies devastated by the dot-com crash. Along with crypto, the high interest rates precipitated by the COVID-19 pandemic, along with poor investing choices by SVB in particular, helped lead to this collapse. The issues involved in 2023 are more nebulous and tied to outside forces or individual actors than the systemic collapse of 2001.

Furthermore, even the depths of the dot-com collapse were nowhere near as damaging as those of the Great Recession. In 2009, unemployment rates hit a height of approximately ten percent, a total that was only exceeded since 1945 by the early 1980s, and the depths of the pandemic. The highest unemployment rate of the dot-com bust was less than six percent. Following the September 11 attacks, the economy would continue on in relatively good health for the next six years.

It is clear that 2001 and not 2009 is the worst-case scenario this time around. Much of the global economy is still relatively healthy, albeit in recovery from the pandemic and its related inflation. The unemployment rate is at one of its lowest levels ever. Large swaths of the economy still face hiring shortages. Wage growth has dropped somewhat but has not yet reversed. Companies are still being founded on a regular basis and releasing significant innovations into the marketplace. As the modest drop in the stock market indicates, not even professionally spooked investors have completely turned on the nation’s economy since Friday.

No observer wants a repeat of the dot-com collapse in 2023. The federal government is working overtime to shore up confidence and keep investors at mid-level banks. The collapse of SVB may even help investors by restricting lending, reducing inflation, and pushing the Federal Reserve to slow interest rate hikes. Bank runs are never a good thing. But they may not be the beginning of a global economic crisis either.