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Stock Strategist

Has Employment Peaked? -- Page 2

A more robust look at jobs data may hold the answer.

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Digging Deeper for Data
Temporary employment, which absorbs employment demand volatility, is a timely leading indicator for overall employment. For example, when a business owner starts to believe that the economy is improving, he or she will often hire a temporary employee to fill growing demand before taking on a new permanent employee, which represents a longer-term commitment to a fixed cost. As the situation improves and it becomes clear that the economy is in full upswing, companies start to hire permanent workers. The reverse is true on the downside. As the economy weakens, temporary employees are the first to be let go, eventually followed by permanent employees, assuming the situation worsens sufficiently.

So, how leading is this leading indicator? If we look at the historical temporary employment services numbers, a rarely publicized figure from the BLS' monthly Employment Situation report, we can see that temporary employment growth turned negative about eight months before the rest of employment posted its first decline in the last recession. (Temporary employment dropped 1% in December 2000, while total employment less temporary employment posted its first decline--0.1%--in August 2001.)

What Is the Data Telling Us Now?
Temporary employment growth turned negative in December 2006 and has remained negative for 12 of the last 13 months. Unfortunately, temporary employment data became available only in 1990, so it's hard to say what a long-run average lead time is, but it's safe to say this is a worrisome trend.

Data from staffing companies, the primary providers of temporary employees, lend further credence to this bearish outlook. Most staffing companies, such as those Bill mentioned earlier, have continued to see revenue growth, but a growing portion of the top-line boost has come from price increases, while in some cases volume has become a drag. As is common in many industries, price increases (bill rates, in this case) often lag the onset of a supply shortage, eventually leading to the counterintuitive situation of rising prices with falling demand (volume). If volume continues to fall, as appears likely, employers will begin to realize that there is an abundance of workers available, pressuring bill rate growth.

What Does All This Mean?
At Morningstar, our equity analysts focus primarily on bottom-up company analysis, but we'd be remiss to ignore persistent trends within economic data. As Bill said earlier, chinks in the labor market's armor are forming, and the data increasingly suggest more, and possibly larger, dents are still to come.

In an upcoming Stock Strategist article, we'll dig deeper into various attributes of temporary employment and its relationship to total employment. We'll also add a microeconomic view through a profile of our employment services coverage universe. This should let us separate good stocks from the bad, given the challenging macro environment.

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