Temporary Work Demand Rises as Companies Avoid Commitments

As orders from food makers have picked up during the past year, Create-A-Pack Foods Inc. turned to a staffing company, Kelly Services Inc. (KELYA), to add about 100 workers.

Hiring on a temporary basis saves money if an employee doesn’t work out and expands recruiting beyond Create-A-Pack’s Ixonia, Wisconsin, headquarters, Chief Executive Officer Glenn Cochrane said.

“You can build good crews with temp services,” he said, noting that the company — which packages products including sauces and icings in pouches, bottles and jars — is seeking to fill another 28 positions.

Create-A-Pack is among a growing number of businesses turning to staffing companies for temporary workers, reflecting employer concern about the U.S. economic outlook. The number of people on the payrolls of temp-staffing businesses grew 10.7 percent in June to 2.5 million from a year earlier, the biggest increase since May 2011, based on data from the Labor Department.

Demand for temporary employees is gaining momentum as companies seek more flexible staffing arrangements, according to Tobey Sommer, director of equity research in Nashville at SunTrust Robinson Humphrey Inc. This has helped create a shift within the labor force, as a “not-easily-forgotten recession” has made many executives cautious about hiring, he said.

Flex Supercycle

A so-called flex supercycle is driving business for Kforce Inc. (KFRC), as a “historically disproportionate” share of new jobs is coming from the temporary-staffing industry, said Michael Blackman, chief corporate development officer for the Tampa, Florida-based company. A shortage of highly skilled candidates in fields such as information technology and “extraordinary uncertainty among employers is leading them to utilize temp resources,” he said.

The hiring environment reflects employer apprehension about costs associated with the health-care law upheld by the U.S. Supreme Court last month and future tax and regulatory policies, as well as economic risk from the federal budget deficit and recessions in Europe, Sommer said.

This is causing many customers of Kelly Services to use temp workers instead of expanding permanent headcount, said Carl Camden, president and chief executive officer of the Troy, Michigan-based company.

This trend was pointed out by the Federal Reserve, which noted that some of its contacts have “become more cautious in their hiring and investment decisions,” according to the minutes of its June policy meeting released July 11.

No Foreshadowing

While hiring among temp workers has historically foreshadowed gains in the broader job market, this time may be different as companies rely on temporary staff for a longer time, said Kforce’s Blackman.

Employers are “looking for the minimum amount of expenditure on labor, the minimum amount of new hires you have to make to meet the pretty anemic GDP growth that we have right now,” Camden said.

U.S. gross domestic product rose 1.9 percent in the first quarter, after expanding 3 percent in the period ended Dec. 31. Second-quarter GDP slowed to 1.5 percent, based on the median estimate of economists surveyed by Bloomberg News.

Increasing demand may boost staffing companies’ financial results. Total revenue from continuing operations at Kforce will rise about 1 percent to $276.6 million in the period ended June 30 from a year ago, based on the consensus estimate of analysts surveyed by Bloomberg. Kforce is scheduled to report second- quarter earnings on July 31, with ManpowerGroup on July 20 and Kelly Services Aug. 10.

Lagging Index

The Bloomberg U.S. Employment Services Index (BNUSSTFF) — which includes these companies and 15 others — has risen 3.3 percent so far this year, compared with the Russell 2000 Index’s 7.9 percent gain.

Investor Jack Ablin at Harris Private Bank in Chicago will be looking for “bellwethers” in the earnings reports about the health of the labor market, he said. These data are “another way to triangulate” information released by the government, which shows that even though employers are opting for temporary help, at least they aren’t downsizing, he said.

The number of hours worked by Kforce temporary staffers is a good proxy for this type of hiring, Sommer said. The total was up 3.4 percent to about 4.4 million hours in the three months ended March 31 from the prior quarter, he said, adding that a similar increase in the second quarter, after accounting for the number of billing days, “would demonstrate robust demand.”

Demand Indicator

Robert Half International Inc.’s (RHI) temporary-staffing business — comprised of its Accountemps, OfficeTeam, Robert Half Technology and Robert Half Management Resources divisions — also is an indicator of demand, Sommer said. If temporary- staff revenue were to grow more than 10 percent in the first three weeks of July — which the Menlo Park, California-based company tends to provide on its earnings conference call — this “would be a win, given 9 percent expected revenue growth in the third quarter,” he said.

The portion of temporary workers relative to all employees on nonfarm payrolls — the so-called temp-penetration rate — was 1.9 percent in June, the highest in five years, Labor Department data show. That’s close to a pre-recession peak of 1.96 in November 2005, said Sommer, who forecasts the ratio will return to this level by January 2013.

Republicans Attack

Republicans have attacked President Barack Obama’s handling of the economy as part of campaigning for the November election, with emphasis on persistently high unemployment. Employers added 80,000 jobs in June, the fourth straight month that gains trailed the median estimate of economists surveyed by Bloomberg News. Payrolls in the temp-staffing industry expanded 25,200 last month, compared with a loss of 7,700 a year ago.

If demand remains sluggish and employer concerns about the economic and business climate worsen, companies may be forced to curtail temporary hiring. The unemployment rate remained at 8.2 percent in June — marking 41 consecutive months above 8 percent — as the total number of Americans on nonfarm payrolls lagged a January 2008 peak by more than 4.9 million.

For now, companies are focused on remaining agile, according to Jeffrey Joerres, chief executive officer of Milwaukee-based ManpowerGroup. (MAN) There are “a lot of bad consequences when you get too bold without looking at these risks.”

Project Assignments

The same principles for other supply chains — like just- in-time practices — also can be applied to talent, said Teresa Carroll, senior vice president for Kelly Services.

“More and more work is being done on a project basis” with an employee having a job for the duration of the assignment, she said.

By turning to Kelly Services, Create-A-Pack reduced the amount of time it takes to get people on the floor of its facility to between one and four weeks compared with as many as 10 weeks, Cochrane said.

While temporary work isn’t always a job seekers’ first choice, Kimberly Smith, 43, said she would take this type of position as a bridge to a permanent post with higher pay and benefits.

“It is a good thing because at least you get your foot in the door and get a job,” said Smith, of Riverdale, Georgia, who’s been unemployed for a year after losing a job at a check- cashing company. “One you are there a period of time, if you are good, they will keep you.”

Small companies aren’t the only ones using temporary labor. Caterpillar Inc. (CAT), the largest maker of construction and mining equipment, had 28,472 so-called flexible workers as of March 31, representing about 18 percent of total employment, according to data from the Peoria, Illinois-based company.

ManpowerGroup’s Joerres hears a familiar theme “again and again” from customers: Until they have more information, executives are delaying hiring, he said. Otherwise, they say, “I’m going to be caught with too many people and it’s painful, it’s expensive, it hurts morale.”

By Anna-Louise Jackson, Steve Matthews and Anthony Feld

Courtesy of Bloomberg News

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