Temporary employment: This bellwether bears watching

Optimism about the strength of the recovery took another hit when the June employment numbers were released recently. Economy-watchers had expected at least modest growth, but seasonally adjusted nonfarm employment fell by 125,000 jobs from May. However, there was good news elsewhere in the labor reports, as private sector temporary employment increased in June for the ninth consecutive month. The temporary help services industry continues to be the largest contributor of new private jobs in the current economy.

Optimism about the strength of the recovery took another hit when the June employment numbers were released recently. Economy-watchers had expected at least modest growth, but seasonally adjusted nonfarm employment fell by 125,000 jobs from May. The decrease was attributed partially to the drop (-225,000) in temporary U.S. Census workers.

But there was good news elsewhere in the labor reports, as private sector temporary employment increased in June for the ninth consecutive month, with a gain of 21,000 jobs (seasonally adjusted). The temporary help services industry continues to be the largest contributor of new private jobs in the current economy.

Compared to June one year ago, temporary help industry employment is up by 342,000 jobs, with 100,000 more jobs than the second largest gaining industry, health care (up 214,000). Meanwhile, the overall U.S. economy has lost 275,000 private nonfarm jobs compared to June of last year (jobs data for year-to-year comparison are not seasonally adjusted).

Temp jobs lead in recovery

Besides being the greatest source of new jobs at present, analysts are watching the temporary help employment figures for another reason. In past recessions, increases in temporary help jobs have signaled hiring in the broader economy a few months down the road. The figure below uses year-over-year percentage changes in employment to show the consistency of the relationship.

The dotted line is percent changes in U.S. temporary help jobs (left scale) and the solid line is changes in overall nonfarm employment (right scale). To interpret the lead-lag patterns in recovery, note where the dotted line moves above zero, signaling positive growth, followed by a similar movement in the solid line further to the right, signifying a delay of a few months.

In the recovery from the recession of 1990, temporary jobs first began consistent positive year-over-year growth in December of 1991. Overall nonfarm employment measured the same way turned positive in April of 1992, some four months later. In the "jobless recovery" following the recession of 2001, temporary job growth sputtered through 2002 and finally posted positive percentage growth in July of 2003. Total employment began to grow over-the-year in December, after a six months lag.

Will the lead-lag relationship hold up this time?

In the current recovery, temporary jobs crossed into the positive growth region in January of this year, and then surged into double-digit growth with gains of 19.4 percent in June, following year-over-year rises of 16.9 percent in May and April's 14.6 percent. So far, total nonfarm employment has not grown year-over-year in any month since the series first turned negative 26 months ago (May 2008).

However, the job loss was under one percent in June and the visual evidence from the figure above suggests total employment will cross into the year-over-year positive region soon. As of now, the lag is five months, still shorter than the six month lag between temp jobs and all jobs year-over-year recovery in 2003. If the lead-lag relationship holds up this time, year-over-year U.S. job growth should become positive sometime in the second half of the year.

A slower second half

There are various reasons why the lag may be greater this time. One is that this downturn was so severe that employers may decide to use temporary workers much longer before making permanent hiring decisions. As businesses deleverage and try to become more cost efficient, temporary workers represent a way to avoid the higher costs of permanent employees.

Secondly, analysts are exhibiting a growing sense of caution about the pace of growth in the second half. According to minutes of its June meeting, the Federal Reserve forecast for 2010 real GDP growth has been cut back from 3.2 to 3.7 percent to between 3.0 and 3.5 percent.

Slower growth in output translates into a reduced pace of hiring and continued problems with high unemployment. The W. P. Carey macro forecast has been adjusted for a slower second half, partly in response to recently revised, weaker Q1 growth in GDP components, and partly due to disappointing figures for employment, retail sales, and credit market activity.

According to the U.S. Bureau of Economic Analysis, first quarter GDP only grew at an inflation-adjusted annualized rate of 2.7 percent, down from the previous estimate of 3.0 percent. Consumption was revised from 3.5 percent growth to 3.0 percent. The second quarter of 2010 (which ended in June) is still expected to be quite strong, with 3.5 percent GDP growth.

A burst of activity in utility and resource construction will move nonresidential structure spending into the positive range, and residential spending briefly will also be positive. But for the year as a whole, the forecast calls for an overall decline in nonresidential spending and no growth yet in residential spending. The residential comeback is now expected to be delayed until 2011.