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A critical leading indicator: Who's hiring?
Employers turn to temp workers first when the economy starts to rebound -- and the big staffing companies say demand, with a few exceptions, remains weak.
By Michael Brush
Does the stock market rally have legs? It all comes down to whether theres enough oomph in the economic pipeline to support the robust market advance since March.
Recent trends paint a tantalizing picture.
By late June, jobless claims declined for the third week in a row, putting in a three-month low. In addition, companies in May were hiring the type of employees they inevitably turn to first when business is picking up -- temporary workers.
Temp hiring advanced 2.7% in May over April. That was the first month-over-month increase since January and the biggest gain since 1999.
Trends like these have spirited fund managers to continue snapping up shares in recent weeks, hoping to buy ahead of better economic growth in the second half. These bulls will be on the lookout for new signs that the labor market is on the right track when the government reports June employment data July 3.
Unfortunately, they'll be disappointed, if staffing companies know anything about cutting-edge trends in the labor market. Trust me, they do.
While there are a few bright spots, leading staffing companies supplying temp workers from Manpower (MAN, news, msgs) and Kelly Services (KELYA, news, msgs) to Labor Ready (LRW, news, msgs) and CDI (CDI, news, msgs) report theres little to get excited about from their perch.
Ready to take off?
There are so many companies that seem to be lined up and ready to take off, says Jeffrey Joerres, Manpower's chairman and chief executive. But no one is hearing the starting gun yet. One of the biggest staffing companies, Milwaukee-based Manpower, provides temporary workers from 1,200 offices around the country to industries ranging from light manufacturing and insurance to information technology.
Manpower saw strength in the first quarter, building on increased demand in the fourth quarter. But the use of temp workers fell flat in the second quarter. Clients are putting out more feelers about hiring, Joerres says. But theyre not closing deals. Companies dont really have the demand that leads to any kind of breakthrough in the labor market, he says.
Its very spotty, agrees Steven Cooper, chief financial officer at Labor Ready, a Tacoma, Wash., company that supplies temp workers chiefly in construction, manufacturing and hospitality from 650 offices around the country. I think we are in a stabilized state right now, but I am not sensing that we are seeing a lot of growth.
On July 3, Detroit-based Kelly Services will report more of the same in its monthly update on employment trends. "The monthly jobs report has been moving steadily toward positive territory in recent months, bringing hope that the latter half of this year will post solid job creation, says Carl Camden, Kelly's president. At present, however, hiring conditions remain weak. It is not clear if the turning point of the economic cycle has truly arrived.
Temp agencies have a special window on the job market because this is where managers turn first when they need an extra person to help unload a truck or a few more hands in the call center.
Temporary help is a leading indicator coming out of any recession, because companies are not quite sure whether their demand is real, says Manpowers Joerres. Typically for the first 18 to 36 months into a recovery we see fairly robust business. Permanent hiring always lags the economy.
Out of the gate
Whats more, these temp agencies serve lots of small companies. Often thats where you see early signs of an economic recovery, because smaller companies hire more quickly when they see an uptick in demand for their products and services.
The real recovery will begin when the phone is ringing off the hook at temp agencies like Manpower, because todays temporary worker become tomorrows full-time worker, agrees Rajeev Dhawan, director of Georgia State Universitys Economic Forecasting Center.
New jobs are crucial to a recovery because theyre needed to sustain the consumer spending thats propped up economic growth so far -- in light of the dearth of capital spending by companies. Sooner or later the extra cash from the home mortgage refinancing boom and tax cuts will run dry.
To me, a recovery is not real until at least 150,000 jobs are created a month, says Dhawan. Right now weve almost got zero. By region, the temp agencies are seeing some strength in the Southeast, and flat demand in the Northeast offset by weakness on the West Coast.
Any advance read on labor-market trends is incomplete without insights from a Kingwood, Texas, company known as Administaff (ASF, news, msgs), which acts as a human resources department for small businesses.
Administaff has a front row seat on the labor market because it processes all the hiring and terminations done by its clients. Because of this perspective, managers at Administaff have a knack for predicting how the official government employment numbers will come in each month, says Richard Rawson, the companys chief financial officer.
Scant improvement
Unfortunately for bulls, theres been scant improvement in the labor market since hiring ticked up slightly in April after hostilities cooled off in Iraq, Rawson says. We dont expect layoffs to get worse, but we really dont see enough activity yet to give us comfort that new hires are going to start exceeding layoffs, he says. From our sales force out in the field talking to small business owners every day, we are not hearing pessimism, but we are not hearing optimism either.
Rawson thinks a better leading indicator for job growth is how much money people earn. Pay picks up as business starts to improve, because people earn more overtime pay, and they sense they have the power to ask for raises. Administaff has a bird's-eye view on pay trends as well, because it carries the employees of clients on its own books, and manages the payroll for them.
For stock market bulls, theres bad news here, too. The average monthly pay for employees recently ticked down to $3,920 after holding at $3,940 for several quarters, down from $4,000 at the start of 2002. I think it is going to be pretty flat for the balance of the year, says Rawson. Administaff has a broad view of the economy because it works for companies in a wide range of sectors -- from finance and health care to construction and engineering to retailing.
Importantly, there are signs that capital spending is picking up in several sectors as companies start to lay out more cash to expand production, says Roger Ballou, the chief executive and president of Philadelphia-based CDI. Hes in a position to know because his company has a staff of engineers and specialists on hand so CDI can accept assignments for clients wanting help building new plants.
Recently, CDI has taken on projects for companies in the pharmaceutical, biotech, petrochemical and defense sectors. We are beginning to see some capital spending and job growth in major industries, says Ballou.
Pharmaceutical companies are gearing up production as drug approvals by the Food and Drug Administration pick up. Theyre also making new vaccines now that homeland defense measures by Congress have eased liability for the drug makers.
The capital spending question
Chemical companies are increasing petrochemical production as the price of the raw material -- oil -- eases. And the defense agencies are spending on next-generation equipment as the nations military upgrades.
While these trends are encouraging, economists question whether capital spending will really take off as long as the nations capacity utilization hovers around 76%. Economists believe it has to rise to 82% for capital spending to become robust. Well get a better read on capital spending this September and October as companies finalize and announce their capital budgets for next year.
Despite these bright spots, hiring in big sectors like information technology remains disturbingly weak. To make matters worse, many tech jobs, such as software-code writing, are moving to other countries, says Ballou. The same thing is happening in areas like help desks and payment processing. Forrester Research estimates that 3.3 million jobs will move to lower-wage countries such as Canada, Ireland and India by 2015.
But dont get too depressed by the current state of the labor market, says Eric Archer, president of the professional recruiting group at Spherion (SFN, news, msgs). Baby boomers will retire at a quick pace in coming years, creating labor shortfalls, he says. Near term, with a presidential election on the horizon, dont be surprised if the party in power stokes the economy to a warm glow and creates healthy job growth by this time next year.
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