Temp help leading the market: bulls vs bears (pt 2)
In honor of Labor Day, a nod to an important sliver of the job force: temporary help. Temps make up just 1.3% of the workforce but are the canaries of the economy: Temp jobs typically shrink months before the economy dips and permanent jobs crater; conversely, temp jobs expand well before the permanent job market recovers.
In other words, the “employment situation” summary (as the bureaucrats in D.C. like to call the jobless report) is a lagging indicator. The 9.7% August unemployment number was no great harbinger; it is important but more like a condolence note — something you get after-the-fact. And, indeed, most economists expect joblessness to continue rising even as the economy recovers and is likely to breach 10%. By contrast, temporary help is a leading indicator. It opens a window into the strategic thinking of entrepreneurs both big and small: Bosses at most companies (especially smaller ones) lay off temps before chopping permanent staff; they hire temps in the early part of a recovery before adding permanent overhead. To any entrepreneur, the reasoning is unassailable.
The fate of the temp help sector has been pretty accurate this go-round in pointing to a severe and lengthy recession. In the past four months, the temp help numbers look as if they have bottomed. That’s the good news. The bad news is that the devastation has been much deeper and longer than previous recessions.
The temp numbers are fodder for anyone trying to figure out whether the summer rally is nothing more than a monster bear market fake-out or if we are on the cusp of a real and lasting recovery. Last week, I posted a chart that showed that during three historic market drops – the Great Depression, the ’70s oil shock, and the 2000-01 tech bubble burst — the price action of the S&P500 was virtually parallel in the first couple of years. After falling from a cliff, the market rallied hard in each of the three cases; but only the oil and tech rallies turned into a true recoveries for stock prices. The market in the ’30s remained depressed.
The temporary help market peaked in December 2006, one year before the permanent labor sector reached its acme and well before subprime had become a four-letter word. Now it looks as if temp help losses are bottoming well before the rest of the job market. In August, it trimmed “just’ 6,500 jobs, down from the 89,900 pace in January.
The temporary help sector revealed early on just how traumatic the market breakdown would be, tumbling at a breakneck pace: By December 2008, the temp help workforce was down 20.5% — much worse than the 15.1% low of 2000. From there, the story only got worse: by August, temp help was down 33% from the December 2007 peak for the labor force, an unprecedented drop of 904,000 positions. Take a look at this graph and you’ll see how bad things have been (if you haven’t been a victim of the Great Recession labor crush).
This next graphic compares the fate of temp help during the 1990 and 2000 recessions — which were not nearly as severe. But they are instructive in showing patterns.
Notice how the temporary job market leads the permanent job market lower by several months. The orange line for 1990, the start of the Gulf War, for example, shows that companies began shedding temp help five months before permanent employment peaked. Similarly, GDP peaked in the first quarter of 1990 at 4.2%, slipped to 1.6% in the second quarter and was unchanged in the third quarter. The last quarter slid 3.5%. But companies began hiring temp help just as GDP resumed its expansion. The permanent labor force expands much more slowly — as much as two years after a recession.
So what does this mean for the bull-bear market? Recovery is on the way, but it will be a long, hard slog.
Bears should hesitate before reading too much in the losses posted so far this month: For stocks, September is the cruelest month of all, falling an average 0.9% since 1959, according to my former USA Today colleague John Waggoner. True to the calendar, the S&P slipped 1.22% this week. So let’s discount this month in looking ahead to whither the market in the bull-bear market debate. Many are using the traditional September dip to buy — but I would navigate this market with great caution. To me, the temp help numbers confirm that while the worst may be over true recovery in terms of rising consumer demand and revenue growth is a long way off. In fact, I believe we are entering a new and unprecedented phase. More of which, next week in the final leg of this series.
Numbers from the Bureau of Labor Statistics