Temp jobs and temp stocks boom as Fed predicts 'jobless recovery'

temp-jobs-and-temp-stocks-boom-forecasters-predict-jobless-recoveryWhile massive layoffs continue to mount even as the unemployment rate blows past 10%, the market for temporary hires is booming. On Friday, the Labor Department said that temporary-worker payrolls rose by 34,000 in October -- the biggest gain in two years. It was the third consecutive monthly gain in temporary employment, even as the overall unemployment rate soared to a 26-year high of 10.2%. Adecco (AHEXY) -- the world's biggest temporary employment firm -- reported better than expected third-quarter earnings amid a pickup in demand.

The boom in temp jobs has been seized on as a ray of light in an otherwise dismal jobs report, since temp hiring has sometimes foreshadowed broader hiring by a few months. But as investors look for clues about the unemployment picture -- which has sweeping implications on items ranging from consumer demand to the Fed's decisions on interest rates -- they should take some major shifts in the U.S. economy into account before relying on a replay of history.
Employers are increasingly turning to temporary hires instead of rehiring full-time workers, and the staffing industry is much better positioned to benefit from some pickup in demand than is the broader economy. And as the Fed pointed out Tuesday, investors should brace for a long spell of high unemployment – one that resembles the jobless recoveries from the last two recessions much more than the quick labor market rebounds of recessions before that.

A Decline in Furloughs and Recalls

The sharp pickup in employment that followed recessions prior to the 1990s was driven in part by the rehiring of workers who had been temporarily laid-off amid falling demand. But with more layoffs going from temporary to permanent over the last two decades, the pace of hiring has also slowed down dramatically. Firms must go through the long process of finding new candidates, while job seekers have to decide which new industries and companies to choose.

As Federal Reserve of New York economists noted at the end of the last recession, "instead of furloughing permanent workers, firms increasingly hire temporary help when they are busiest and then cut back when demand falls." As a result, the "personnel supply industry" ballooned from just 214,000 jobs in 1972 to almost 4 million in 2000.

The Bureau of Labor statistics predicts more blistering growth ahead. The temp industry is projected to be among the fastest growing in the country, expected to add 691,500 jobs by 2016, rising to a level of 4.3 million that year -- an average annual growth rate of 1.7%.

Instead of betting that the growth in temp jobs heralds a turnaround for the broader labor market, then, investors might be better off betting on the temp services companies that profit from the boom in the market instead.

Shares of major staffing companies Manpower (MAN) and Trueblue (TBI) are both up 90% over the past year, and Robert Half (RHI) has already rallied sharply. But if employers bank on temp work more than is widely expected, those stocks could rally further as the economy turns.
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