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Temporary worker drop may be signaling slowing economy

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6 months ago

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Temporary worker drop may be signaling slowing economy

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Temporary workers were hit with 49,000 job losses in June, more than any other industry, and a possible sign the labor market is poised to cool significantly in the months ahead.

The decline, highlighted in the June employment report released Friday, caps a stunning two-year streak of job losses in a sector that traditionally has served as a bellwether for hiring across the U.S. Temporary staffing agencies serve a variety of industries but especially manufacturing, warehousing, retail, health care, technology and administrative office work.

Since peaking at a record 3.2 million jobs in April 2022, temporary help services have lost 515,000 positions, or 16% of the total, more than any other sector. They’ve shed jobs 26 of the past 27 months and total employment of 2.7 million last month was the lowest since November 2013.

The temp agencies place the workers, often in a series of positions, but the jobs are held or lost at the companies where they work.

Why do companies hire temp employees?

Traditionally, temp workers are the first hired as the economy emerges from a slowdown and the first let go as growth sputters or the nation slips into a downturn. That’s because contingent workers can be added or fired quickly without the need to pay benefits, or severance in the event of layoffs.

The pandemic turned that dynamic on its head. In 2021 and 2022, companies brought on several hundred thousand temporary employees as the economy bounced back strongly from the health crisis and companies struggled to find permanent workers.

Yet starting in spring 2022, with the economy and job market still going strong, businesses began cutting temp workers or hiring fewer of them. Some of the pullback could be traced to recession jitters as the Federal Reserve began aggressively hiking interest rates to fight inflation, says Timothy Landui, vice president of research for Staffing Industry Analysts, which conducts research on staffing companies.

Are companies still laying people off?

But much of the drop was due to companies’ preference for permanent workers as they faced unprecedented labor shortages. Employers were converting temporary workers to permanent ones at a historic clip and holding on to permanent employees rather than laying them off even if they faced a drop-off in sales, Landhui says.

Now, companies are turning even more temps into permanent staffers, officials say. Manpower North America, a top staffing firm, says its clients are converting 16% of the temps it places, up from an a typical 4% to 7%, says company Senior Vice President Rajesh Namboothiry. What’s more, they’re making those switches after the temp has been working an average three weeks or so, down from a typical three or four months, he says.

The trend underscores that many companies, still smarting from the COVID-induced labor crunch, continue to seek and retain skilled staffers for the long term, Namboothiry says. Also, as the pandemic has faded and immigration has surged, more permanent workers are available, reducing the need to hire temps, Landhui says.

How is the US economy right now?

But increasingly, firms are also bringing on fewer contingent workers as the economy slows because of high interest rates and easing but still-elevated inflation. Demand for temps at Manpower is down about 20% this year, Namboothiry says.

“Demand is down overall,” he says. Companies are “not looking to hire (temp workers) at the pace they were.”

‘They were costing too much’

Neema Hospitality, which owns 11 hotel franchises in the mid-Atlantic region, hired lots of temporary housekeepers from staffing agencies as the company struggled to find long-term staffers after COVID, says company President Sandeep Thakrar. But he has dramatically scaled back his use of temps.

“Over time, we were able to find more permanent employees,” he says.

Plus, he says, “They were costing too much,” adding that their wages have risen and every time some temps quit, Neema would have to spend time training a new batch.

But another reason he has pared back temp hiring is that hotel occupancy is down 1% to 3% this year. Many low- to middle-income households are coping with near-record credit card debt and rising delinquencies.  

“People are running out of money,” he says.

Has hiring slowed down?

Despite June’s 206,000 payroll gains, the private sector added just 136,000 jobs last month and the unemployment rate edged up to 4.1%, from 3.9% in May and 3.7% in January. That’s the highest since November 2021.

Monthly payroll gains are projected to slow to about 125,000 by the fourth quarter as economic growth downshifts to about 1.6% annualized from a projected 2% in the second quarter, according to the National Association of Business Economics and Wolters Kluwer Blue Chip Economic Indicators.

Early this year, many businesses expected the Fed to reduce interest rates several times in 2024 as inflation eased, juicing the economy and temp hiring, says Noah Yosif, chief economist of the American Staffing association, which represents staffing firms.

But those hopes have been tempered by inflation that picked up in the first quarter and led the Fed to proclaim it will keep rates higher for longer. Companies, in turn, are adding fewer temporary employees, Yosif says.

Why do people work as temps?

A shrinking temporary staffing workforce limits a popular option for employees who like the flexibility and variety of learning experiences offered by contingent work through staffing agencies, Landhui says. Employees can work for several weeks or months and then take a break and often can work remotely. Many Americans also turn to temporary jobs when they get laid off from permanent positions.

Although many of the temps who lose their gigs snare permanent jobs, Landhui says, others may struggle, especially with the labor market softening.

“It is concerning,” he says. “To some extent, temporary work may provide a safety net. If temporary demand is down it may be more challenging for individuals” to replace their lost income.

In a recent report, Landhui cited other reasons temp employment has plunged:

A snap-back from record high

In the aftermath of the pandemic, temp staffing  reached “unsustainable levels,” fueled by both a shortage of permanent workers andtrillions of dollars in federal COVID rescue spending. Amid a dire need for nurses, the number of daily travel nurses swelled from about 50,000 to 160,000 in 2022, the study says. That figure is returning to its prepandemic level.

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Manufacturing is hurting

Manufacturing, trucking and warehousing make up about two-thirds of the jobs held by temporary workers but those industries have been hit hard by a shift in consumer purchases from goods to services since COVID lockdowns ended.

Higher costs

Hiring temp workers has become far pricier, with costs rising 30% from 2019 to 2022. Although U.S. wages have surged broadly, the cost advantage of temp services has narrowed. As a result, more companies are bringing on permanent staffers or replacing some temps with automation.

Gig work force still healthy

While temp jobs dispatched by staffing agencies have tumbled, the contingent workforce broadly is still growing. Many Americans are working as contractors, consultants, freelancers and gig workers and many companies are hiring them directly rather than going through staffing agencies. There are a total 19.4 million contingent workers in the U.S., comprising 12% of the U.S. work force,

Also, rather than hire employees themselves, businesses increasingly are contracting with tech companies for, say, computer services and relying on those firms to provide their own workers.

What is the outlook for temp jobs?

Michael Schultz, an SIA economist, thinks the big decline in temp jobs last month was overstated and could be revised up. Until June, the drop in temp jobs had eased notably this year compared to 2023.

With many young people preferring more flexible jobs and gig work, Landhui says he’s confident temp staffing employment will rebound.

Namboothiry also expects a comeback when the economic outlook brightens.

“Once demand bounces back, you will see a…spike in temp jobs,” he says.

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