Our Picks for a Grim Employment Climate

Signs of a recession abound. Positive macroeconomic data points are rare these days, and the Federal Reserve's emergency 75-basis-point cut of the federal-funds rate, the largest reduction in more than 20 years, is solid evidence that the data is as bad as it seems. In contrast, employment has seemingly been one of the few resilient indicators thus far. However, if we dig a little deeper into the data and segment the more highly publicized labor figures into their components, a different, less favorable picture emerges. For a primer on the subject, one of our recent Stock Strategist articles on employment is a good place to start.

The goal of this article is not to make the case that recession is imminent, but rather to suggest that employment won't necessarily keep us out of one. First, I'll highlight a few data series released by the Bureau of Labor Statistics that show early signs of weakness in the labor markets. Second, I'll discuss reasons to be suspect of some labor data. And finally, I'll break down the impact that we think this environment will have on the employment-service companies in our coverage universe. This batch of stocks has been battered during the last year, and though the sell-off was well deserved for many, there are pockets of undervaluation that we'd like to bring to your attention.

The View from 30,000 Feet
Many of the widely followed employment statistics are coincident indicators at best and lagging indicators on average. In other words, if employment growth is negative and the unemployment rate has spiked, the economy is either knee-deep in recession, or just exiting one. This can be seen in the chart below, which displays recessionary periods as gray shaded areas. (Recession dates were obtained from the National Bureau of Economic Research.) Although recent data is not alarming, even from this high-level perspective, we can see that employment trends in 2007 were not good and became worse as the year progressed.

Are There Leading Employment Indicators?
While there are probably many macroeconomic data points available that have foreshadowed employment weakness in the past, there are a few leading indicators contained within the employment environment that are worth discussing.

Temporary Employment
For details regarding the supply-and-demand drivers of the temporary labor market, we recommend reading the employment-related Stock Strategist article mentioned above. The bottom line is that there are logical reasons why temporary employment tends to lead total employment on the downside as well as the upside. As you can see in the chart below, temporary employment turned negative in late 2006. It's also worth noting that even though temporary employment growth slowed substantially in the mid-1990s, it never turned negative, and a recession didn't ensue. This chart also shows how volatile the temporary labor market is relative to overall employment (more on this later).

Part-Time for Economic Reasons, Job Losers, and Temps
First, the part-time for economic reasons data series is interesting because these are people that would like to be working full-time, but due to economic pressures, their employers have either reduced their hours or hired them for only part-time work. These employees are generating income, but it's possible they are not making ends meet--and they're not counted in the overall unemployment number. The second data set includes temporary workers (giving us more history than is available on temporary employment alone) and job losers. Although there are many reasons why a person might lose a job or why a temporary employee's contract isn't renewed, overall, it's an economic decision by the employer. As you can see, these indicators tend to lead recessions by about a year, and both of them seem to have bottomed about a year ago.

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