Weak Jobs Report Drives Misreading of Temp Hiring Gains

Compared to the gains recorded earlier this year, last Friday’s jobs report was an unambiguous disappointment. The downshift from January, which saw private sector net hiring approach a six-year high, has reinforced the inherent fragility of the recovery and its continued susceptibility to domestic and European policy shocks.

Could conditions in the labor market improve materially? Businesses’ underlying profit positions suggests that an uncertain outlook for demand remains the constraining factor in hiring decisions. If sentiment shifts abruptly (again), the pace of hiring has the potential to accelerate. Until that happens, expectations of broad, sustained improvements in commercial fundamentals demand continued scrutiny.

In searching for hidden signs of strength, the most prevalent misreading of the jobs data relates to temporary employment, which contributed almost one-third of June’s net employment gain. The pedestrian analysis posits that temporary hiring is a leading indicator of full-time employment, even though it represents a small fraction of total employment in the US economy. That might be true a lot of the time, but it is not true all of the time. In the current context, the favorable interpretation of temporary hiring ignores its underlying causal factors. A fragile economic recovery and exaggerated political uncertainties mean that businesses remain averse to the cost and commitment of full-time payroll expansion, opting instead for flexible inputs.

At least in the short-term, a flexible employment strategy has served businesses well. Temporary hiring ramped up in 2010, with year-over-year gains peaking at 22 percent that September. When the recovery faltered, firms using temporary workers could adjust their labor costs more easily than if they had made full-time commitments. Temporary hiring did not presage a material increase in permanent hiring; rather, it reflected uncertainty about whether the demand outlook warranted full-time commitments and their associated overhead. The temporary-to-permanent relationship is conditional. So far into the recovery, the condition has struggled to be met.

Above: In the time since net hiring turned positive more than two years ago, there has been no sustained, demonstrably positive statistical relationship between temporary employment changes and contemporaneous or lagged permanent hiring. The chart offers a simple time series illustration that can be evaluated more thoroughly in a statistical context.