Signs of a deteriorating labor market

Signs of a deteriorating labor market


Derek Hamilton

  • Managing Director, Economist – Ivy Equity Boutique
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Employment growth in the US has been slowing over the past year, and we believe this trend will continue in line with our expectations for a recession. Many leading indicators currently point to further deterioration in labor markets. One such indicator is temporary (or temp) employment. Historically, the year-over-year percentage change in temp employment has been useful to help gauge the direction of the overall job market and the economy as a whole. This measure of temp employment has been falling since December 2022. Temp employment’s reliability as a leading indicator has recently been called into question, with some saying the relationship between temp employment and the economy no longer holds.* We disagree with this assessment.

As shown in the chart below, the growth rate of total private employment (excluding temp employment) has tended to follow the growth rate of temp employment. While the exact timing of a decline may vary between the two, one inevitably follows the other. The argument that “this time is different” centers on the labor market’s current strength, suggesting that falling temp employment could simply reflect that people are finding permanent jobs and labor markets are more efficient than in prior cycles.

However, as mentioned earlier, a number of other indicators point to a deteriorating labor market, including:

  • In the US Bureau of Labor Statistics’ latest monthly employment report, a growing number of people surveyed said they had lost a job in the past month. This number is not the same as headline unemployment because workers can lose a job and find another. But historically, a rise in this measure of jobs lost while temp employment is falling has suggested a weaker economy.
  • Consumers are saying it is increasingly difficult to find a job. The last Conference Board’s Consumer Confidence Survey asked consumers how easy it is to find a job, and respondents were the most pessimistic they have been in more than two years. This survey suggests to us that the unemployment rate should begin to increase.
  • The recent National Federation of Independent Businesses’ Small Business Economic Trends Survey suggests that hiring plans have deteriorated to the point that the unemployment rate has begun to rise.

We believe these indicators suggest that investors should take the decline in temp employment seriously.

Private and temporary employment growth

Monthly data: January 1, 1991–August 1, 2023 Private and temporary employment growth

Note: Shaded areas of chart indicate recessionary periods.

Sources: Macquarie, Macrobond, US Bureau of Labor Statistics.

Chart is for illustrative purposes only.

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*Lauren Weber, “Companies are using fewer temp workers, but that doesn’t portend a downturn,” The Wall Street Journal, August 31, 2023.

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