the By St even P. Berchem, CSP

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1 Navigating 1% the Economy Annual economic analysis explores staffing and recruiting industry data and trends By St even P. Berchem, CSP Spotted in the Aug. 4 issue of the New York Times Magazine column That Should Be a Word : slowth.1 Could be a combination of slow and growth. Like watching flowers bloom, milk curdle, or U.S. gross domestic product expand. Editor s note: This analysis, prepared August 2013, provides an overview of the size, scope, and dynamics of the staffing industry. It is intended as a general reference for staffing firms, staffing clients, industry analysts, journalists, and policy makers. The analysis is also available on the ASA website at americanstaffing.net (click on Data and Research) as well as on ASA Digital at americanstaffing.net/digital, which offers interactive, page-turning replicas of select ASA publications StaffingSuccessSpecialIssue13-PRESS.indd 11 Staffing Success 11 9/12/13 10:54 AM

2 U.S. GDP averaged an annualized growth rate of just under 1% over the first three months of 2013, according to figures released July 31 by the U.S. Bureau of Economic Analysis (see Figure 1). While the July 31 preliminary estimate for the second quarter of this year came in at 1.7%, most BEA GDP figures have been revised down since 2009, when the Great Recession ended. For example, in the July 31 release, BEA slashed more than a half of its first estimate and more than a third of its second estimate of GDP growth for this year s first quarter, changing it to 1.1%. 2 The U.S. economy barely eked out any growth in 2012 s fourth quarter: 0.1% annualized. In the first three years of recovery from the Great Recession, July 2009 through June 2012, quarterly GDP grew at an average annualized rate of 2.4%, subpar compared with the 2.8% rate of the expansion and well below the average annual growth rate of 3.3% from 1929, when the U.S. Department of Commerce began tracking GDP, to Janet Yellen, vice chairman of the Federal Reserve Board of Governors, has remarked that over the same span of time during the previous 10 recoveries, GDP growth had been about twice as fast as it s been in the current recovery. 3 The persistent weakness in growth and the recent dip, in particular, prompted the Federal Open Market Committee of the Federal Reserve Board of Governors to downgrade its characterization of economic activity in the first half of 2013 from moderate to modest. 4 What precipitated the most recent weakness? In the summer of 2012, worries festered over an impending fiscal cliff, a phrase coined by Federal Reserve chairman Ben S. Bernanke in congressional testimony regarding large spending cuts Figure 1: GDP Resumed Growth in the Third Quarter of 2009, But Has Been Subpar, and Is Forecast to Remain Modest Quarterly GDP Percentage Change From Previous Year (Annual, Seasonally Adjusted) 2.7% Average , Between Recessions 2.2% Average in Current Recovery Forecast Source: U.S. Bureau of Economic Analysis, 1Q02 through 2Q13 (preliminary), July 31, 2013; and forecast of 46 economists surveyed by the Wall Street Journal 3Q13 2Q14, August 2013 and tax increases scheduled to take effect Jan. 1, The Congressional Budget Office estimated that going over the cliff would contract GDP at an annual rate of 1.3% in the first half of 2013, which it said would likely tip the U.S. economy into recession. 6 Congress and the White House brokered a last-minute, retroactive deal in January, forestalling much of the adverse effect, but they still enacted tax increases and spending cuts that trimmed economic growth. 7 And the economy suffered from the uncertainty leading up to the deal. Economists Scott R. Baker and Nicholas Bloom of Stanford University and Steven J. Davis of the University of Chicago have estimated that an increase in policy uncertainty from 2006 through 2011 (which includes the bank bailouts, the debates over fiscal stimulus, and the debt ceiling dispute) reduced GDP by 3.2% and cost 2.3 million jobs. 8 Uncertainty remained high in Besides the fiscal cliff, America spent much of the year anxiously awaiting a U.S. Supreme Court decision on the constitutionality of the Affordable Care Act (see Staffing and Obamacare: Whither the Windfall? see page 41) and the outcome of national elections that would usher President Barack Obama into a second term and keep Congress divided. Using the Baker et al. model, Vanguard Group economists estimated that the continued policy uncertainty in 2012 cost the equivalent of $800 per person. The investment management company s chairman and chief executive officer Bill McNabb called it an uncertainty tax. Without it, he said, the U.S. labor market would have added roughly 45,000 more jobs per month. 9 Companies and small businesses are in good shape and have money to spend. So why aren t they pumping more capital into the economy, creating jobs, and fueling the country s economic engine? he asked. Quite simply, 12 Special Issue 2013

3 if firms can t see a clear road to economic recovery ahead, they re not going to hire, and they re not going to spend. ManpowerGroup chairman and CEO Jeffrey A. Joerres observed in July 2012, while urging businesses and government to focus on job creation: Employers face heaping amounts of uncertainty. 10 In December 2012, with America teetering on the edge of the fiscal cliff, Baker et al. measured U.S. economic policy uncertainty at 200, the secondhighest level in the 28-year history of their index. The highest was 245 during the debt ceiling dispute 17 months prior. 11 In addition to domestic policy uncertainty in late 2012 and early 2013, and fiscal constraints imposed in early 2013, the U.S. economy also faced substantial headwinds from abroad. In Europe, a recession that started in late 2011 persisted into 2013, 12 becoming the longest on that continent since World War II. 13 In China, GDP cooled from a 9% 10% annual growth rate in recent years 14 to growth as low as 7.5% in the first half of Japan has emerged as a relative economic star, compared with its decades-long stagnant performance, with 2013 GDP growth expected at 2%. But overall global demand softened. The International Monetary Fund estimates that the combined economies of advanced countries grew only 1.2% in 2012, and it s projecting the same meager 1.2% for Does 1% growth suggest a recession on the horizon? Nobody seems able to accurately predict recessions, except to observe that they occur in one- to 10-year cycles and average about six years apart. 17 But economists are mostly sanguine about current economic conditions. In an August 2013 survey of 53 economists polled monthly by the Wall Street Journal, they said, on average, that there was only a 13% probability of a recession in the coming 12 months. While one noted that slow GDP leaves little room for error, another commented that there are very few imbalances in the economy. As a group, economists are forecasting a return to normal growth through mid Using a different measure, Edward P. Lazear, who was chairman the president s Council of Economic Advisers from 2006 to 2009 and now serves as a professor at Stanford University s Graduate School of Business and as a fellow at the Hoover Institution, agrees that a recession is unlikely. He shows that the performance of the Standard & Poor s Composite Index of 500 stocks is a statistically reliable predictor of future GDP. An 80-point increase in the S&P 500 index predicts half a percentage point increase in GDP a year later. The market is predicting another year of just muddling along, he said. We Percentage Change From Start of Recession Change in U.S. Output (Real GDP in Chained 2009 U.S. Dollars) From Start of Recessions * Quarters From Start of Recession can expect that next year s growth will be around 1.9%. 19 Jobs: Still on the Road to Recovery The Great Recession was worse than any since World War II (see Figure 2). On average, the 10 recessions between WWII and the Great Recession lasted 10 months. The Great Recession lasted Beginning with the first quarter of 2008, real GDP declined in five of the following six quarters to mid At that point, the cumulative damage was a stunning 4.3%, far exceeding the depth of the prior worst recession in the postwar era, which was 3.6% in Unlike the recession, the 1957 recession lasted less than a year, and the U.S. economy fully recovered from that recession in two quarters. 21 U.S. real GDP did not return to its Figure 2: In the Great Recession, U.S. Output Fell by 4.3%, Deeper Than Any of the Previous 10 Postwar Recessions And Recovery Has Taken Longer Too. Mildest Median Source: Federal Reserve Bank of Minneapolis; updated July 31, 2013 * Output is gross domestic product adjusted for inflation as calculated by the U.S. Bureau of Economic Analysis. Mildest, median, and harshest lines reflect the previous smallest, median, and largest declines as of each quarter; they do not reflect specific individual recessions. 16 Harshest Staffing Success 13

4 prerecession level until 2011 four years after the Great Recession started, and two and a half years after the recovery began. Real GDP for 2011 exceeded the 2007 level by only 1.2%. 22 Crossing the prerecession threshold in real GDP is an important milestone Figure 3: Per Capita GDP Peaked in With the U.S. Population Growing Faster Than the Economy, Per Capita GDP Remained Below its Prerecession Peak Through U.S. Real GDP Per Capita (in Chained 2009 U.S. Dollars) 50,000 49,000 48,000 47,000 46,000 45,000 44,000 Change From Start of Recession Change in U.S. Employment From Start of Recessions * in measuring economic recovery, but it ignores changes in population. If a country s population grows faster than its GDP, its people become poorer. Kenneth Rogoff, co-author of the best-selling academic book This Time Is Different: Eight Centuries of Financial 2008 Months From Start of Recession Source: U.S. Bureau of Economic Analysis Figure 4: The Great Recession Was Deeper Than the Previous 10 Recessions Since World War II At Its Lowest Point, Employment Fell by 6.3%. Mildest Median Harshest Source: Federal Reserve Bank of Minneapolis; updated Aug. 2, 2013 * Employment is nonfarm payroll employment calculated by the U.S. Bureau of Labor Statistics. Mildest, median, and harshest lines reflect the previous smallest, median, and largest declines as of each month; they do not reflect specific individual recessions. Folly with fellow Harvard University economist Carmen Reinhart, has argued that after the kind of deep financial crisis that fundamentally caused the Great Recession, it takes an average of four and a half years to return to precrisis per capita GDP and employment. 23 In the four years it took for real GDP to surpass its prerecession level, the U.S. population grew considerably faster than the economy (4.1% versus 1.2%), so per capita GDP has been slower to recover (see Figure 3). 24 Five years into the recovery, per capita GDP was still shy of its prerecession level: $49,311 in 2007 versus $49,226 in 2012, or $85 less per person. Early BEA estimates for GDP in the first half of 2013 suggest that per capita GDP may have finally exceeded its precrisis level five and a half years after the crisis started, and a full year later than Rogoff projected. Real GDP has recovered. And so has per capita GDP. What about employment? There is still much terrain to traverse before the U.S. recovers all of the jobs lost during the Great Recession (see Figure 4). U.S. nonfarm employment peaked at 138 million payroll jobs when the recession started. In early 2008, employers started cutting about 80,000 jobs per month. By summer, those numbers swelled to more than 200,000 per month. By September when Lehman Brothers collapsed and the banking crisis consumed Wall Street, Pennsylvania Avenue, and Main Street those cuts more than doubled, only to double again within months. The most extreme job losses occurred in March 2009, with 830,000 cuts in that month alone. The volume gradually tapered off until the end of But sustained hiring didn t resume until March 2010, well after the recession ended. Within a two-year span (that felt like an eternity), more than 8.7 million jobs disappeared Special Issue 2013

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6 Half a million more jobs were lost in the 18 months of the recession than had been created during the 73 months of the prior expansion ( ). The economy as measured by real GDP and per capita GDP has recovered. But two million of those lost jobs have yet to be recovered. Somehow businesses managed to surpass their 2007 output with two million fewer workers. With so many job losses, unemployment skyrocketed, going from 4.4% in May 2007 to 10.0% in October In absolute terms, that 10.0% rate was second only to the 10.8% peak during the recession, but that rate started from a much higher trough of 7.2% so the increase then was 3.6 points, compared with a 5.6-point increase during the Great Recession. In the 1980s, the unemployment rate returned to its prerecession level in three and a half years. In July 2012, five years after the Great Recession started, the U.S. unemployment rate was 7.4%, still less than halfway toward full recovery. Full employment has been variously defined over time. Currently, the U.S. Bureau of Labor Statistics uses 5.1% as its full-employment benchmark. 27 Members of the Federal Open Market Committee of the Federal Reserve Board of Governors the body that sets short-term interest rates use a range of 5.2% to 6.0% in the unemployment rate as their operational definition of full employment. 28 The Congressional Budget Office uses 5.5% in its fiscal projections. 29 Figure 5: After Peaking at 62.9% in January 2008, the Employment-to- Population Ratio Dropped to 58.3% in December 2009, Its Lowest Point Since Labor Economist Jesse Rothstein Attributes The Decline Almost Entirely to Falling Labor Force Participation Among the Nonemployed. Nonfarm Employment Index and Employment-to-Population Ratio (%) Nonfarm Employment Index (January 2004 = 60), Employment-to-Population Ratio, and Unemployment Rate (All Seasonally Adjusted) Employment-to-Population Ratio (Left Axis) Unemployment Rate (Right Axis) Nonfarm Employment Index (Left Axis) Source: American Staffing Association analysis of data from the U.S. Bureau of Labor Statistics Unemployment Rate (%) On Dec. 12, 2012, Fed Chairman Ben S. Bernanke surprisingly announced that the board would continue its highly accommodative stance at least as long as the unemployment rate remains above 6.5% as long as inflation expectations remained well anchored. It s unclear whether that means a new Fed benchmark for full employment. 30 Whether it s 6.5%, 7.5%, or 10.0%, the headline unemployment rate misses the many human beings who are underemployed or who have given up looking for work. BLS defines unemployed as all persons who are without jobs and are actively seeking and available to work. 31 Add the underemployed, and the scope is breathtaking. BLS estimates that the number of unemployed and underemployed people who are marginally attached to the work force or working part-time because they cannot find full-time jobs totals nearly 17 million Americans. Close to a million discouraged workers have stopped looking for work. BLS says that nearly 22 million Americans want work they can t find. That s 14.0% of the U.S. labor force, or one out of seven American workers. As eye-popping as those numbers might be, more troubling is Americans withdrawal from the work force. This decline is almost entirely attributable to falling labor force participation among the nonemployed, said Jesse Rothstein, a labor economist with the University of California, Berkeley, and the National Bureau of Economic Research. 32 The employment-to-population ratio dropped from 62.9% in January 2008 to 58.3% in December 2009, which then was its lowest point since 1982, and it s hovered around 58.5% since. More than eight million people exited the work force in just two years, much more rapidly than in the previous two years sharply bucking a trend of the previous several years (see Figure 5) Special Issue 2013

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8 Just over 6.7 million jobs have been created since nonfarm employment began growing again in March 2010 averaging about 164,000 jobs per month (see Figure 6). 34 At the rate of job creation in the first half of 2013 (192,000 per month), it would take almost another year for nonfarm employment to reach its prerecession level (see Figure 7). If that happens, it would be two years beyond Rogoff s four-and-a-half year projection. Given population and, therefore, work force growth, it could take even longer to bring the unemployment rate down to its prerecession level of 4.4% if ever. Although projecting future employment growth is complex and uncertain, separate papers published recently by the Federal Reserve Banks of San Francisco and Chicago examine demographic trends that suggest more promising outcomes. San Francisco Fed economists looked at past recession and recovery patterns and concluded that as the current recovery strengthens, labor force participation will increase. They note that participation began to decline around 2000, and that the Great Recession significantly accelerated work force withdrawal. But in the recoveries from the previous three recessions, participation rates rebounded after payroll employment returned to prerecession levels. Given the depth of the Great Recession, they argue, it will be a few more years before employment returns to its prerecession level, after which time economic pressures would build to increase the labor force participation rate. 35 In a Chicago Fed Letter published in July, economists concluded that changing labor force demographics and slower population growth will substantially reduce the rate of job creation required to reduce the unemployment rate. During the 1980s and 1990s, the economy needed to create 150,000 to 200,000 jobs per month to maintain full employment given population growth and the demographics of those decades. In 2000, both labor force participation and population growth rates began to decline, due in large measure, respectively, to the aging of the Baby Boom generation and reduced immigration. Given that recent job growth trends are bringing the unemployment rate closer to its natural, full-employment level of 5.25%, the economists estimate that within a couple of years, job growth of only 80,000 per month will be required to maintain full employment, and that rate will drop to 35,000 per month, on average, from 2016 to 2020 (see Figure 8). 36 Their model is simple and powerful. If they are right, the U.S. jobs recovery could come sooner than many expect. Figure 6: The Great Recession Resulted in 8.7 Million Job Losses in 26 Months. Only 6.7 Million Jobs Have Been Regained in the First 40 Months Since Employment Growth Resumed A Net Loss of 2 Million Jobs. Monthly Net Changes in Total Nonfarm Employment (in Thousands) Average Monthly Job Gains During Recovery: 164, Average Monthly Job Losses During Great Recession: 415, Source: U.S. Bureau of Labor Statistics 18 Special Issue 2013

9 Structural and Cyclical Factors The Chicago and San Francisco Fed papers illustrate the challenges economists face in trying to tease out the extent to which both structural and cyclical factors explain the relatively weak economic and employment recoveries from the Great Depression. Fed vice chairman Janet Yellen has said she believes that the painfully slow recovery for America s workers is fundamentally due to lack of demand for labor. The bursting of an unprecedented housing bubble, together with the financial crisis that followed, dealt a huge blow to demand. At the same time, she acknowledges that some structural factors may be playing a role. In particular, unlike previous recessions where employment declines were mostly due to temporary layoffs, and workers would return to their previous jobs when demand resumed, the Great Recession resulted in job losses that were permanent. This resulted in long-term unemployment, making it harder for the jobless to find new occupations. Moreover, although the evidence is mixed, Yellen said, some of the long-term unemployment may be due to skills mismatches in which jobless workers are not qualified for the new jobs being created in the recovering economy. 37 Structural changes in the economy are generally permanent. For example, America s transition from an agrarian society through the Industrial Revolution, and, more recently, from the Industrial Age into the Information Age, involved massive structural changes. Demand for buggy whips and typewriters disappeared, as did employment among their manufacturers. Cyclical factors tend to be temporary, lasting perhaps a few years. These are economic booms and busts, expansions and contractions, recoveries and recessions. The staffing and recruiting industry is hypercyclical, meaning its business Figure 7: The Lag Time Between When Recessions End and When Nonfarm Employment Returns to Its Prerecession Level Has Been Increasing Sharply in Recent Recessions. If the 2013 Pace of Job Growth Were to Continue, Nonfarm Payroll Employment Would Return to its 2007 Peak in Months From End of Recession to When Nonfarm Employment Returned to its Prerecession Level Source: American Staffing Association analysis of data from the National Bureau of Economic Research and U.S. Bureau of Labor Statistics Figure 8: Changing Labor Force Demographics and Slower Population Growth Are Substantially Reducing the Rate of Job Creation Required to Maintain Full Employment From More than 200,000 Per Month in the Mid-1990s to 35,000 Per Month in the Late 2010s. Annual Average Monthly Change in the Trend in Payroll Employment Growth (in Thousands) Projected 60? Source: Federal Reserve Bank of Chicago Staffing Success 19

10 Figure 9: Staffing Employment Is Hypercyclical, Meaning its Business Cycle Tends to be Exaggerated During Economic Expansions and Contractions. Percentage Change From Previous Year (Annual) 40% 30% 20% Temporary Help Employment 10% Gross Domestic Product 0% Nonfarm Employment % Recessions (Shaded Periods) -20% -30% Sources: National Bureau of Economic Research, U.S. Bureau of Economic Analysis, and U.S. Bureau of Labor Statistics Figure 10: Staffing Employment Tends to be Seasonally Cyclical, Lowest at the Beginning of the Year and Highest Toward the End, As Seen in the More Typical Years of 2007 and Weeks of ASA Staffing Index: June 2006 (When the Index Was Introduced at 100) Through July Source: American Staffing Association 20 Special Issue 2013

11 cycles tend to be exaggerated during economic expansions and contractions (see Figure 9). Temporary and contract employment also tends to be seasonally cyclical, usually lowest at the beginning of the calendar year and highest in the fourth quarter (see Figure 10). An atypical pattern emerged in And that pattern prefaced how dramatically staffing jobs can be affected by disturbances in the economy. In the first half of 2008, temporary and contract employment failed to show its usual rise. The ASA Staffing Index, which measures weekly changes in temporary and contract employment, was uncharacteristically flat. It changed little from early January through the end of June. Then the usual Independence Day holiday dip was deeper than normal, and staffing employment stalled until mid- September, when Lehman Brothers collapsed and the banking crisis occurred. Temporary and contract employment likewise collapsed. When business is going badly, staffing clients usually respond quickly by first shedding temporary and contract workers. By the fourth quarter of 2008, the U.S. economy was in free fall. Staffing employment, instead of climbing to its usual seasonal peak in that period, contracted by a quarter of a million workers the most severe decline in the recorded history of the industry. In January 2009, the White House estimated that payroll employment in temporary help services accounted for one in five job losses in In contrast, in the early stages of an economic recovery, businesses turn first to temporary and contract workers to help meet growing demand. Hence a rapid uptick in staffing employment after the Great Recession ended. In the first three years of recovery from the Great Recession, the U.S. staffing and recruiting industry created more jobs than any other single industry in America, adding nearly 763,000 employees to their payrolls, according to BLS. 39 Yet the industry accounts for less than 2% of total U.S. nonfarm employment. 40 By comparison, BLS has estimated that the entire health care industry, which includes hospitals, doctors offices, nursing homes, outpatient clinics, and home health care and altogether constitutes 11% of the U.S. nonfarm work force added more than 600,000 jobs during the same three-year period. 41 U.S. staffing industry growth was more robust in the first three years of the recovery than in the same span after the previous two recessions (see Figure 11). Structural Shift? Could the exceptional growth of the staffing industry during the early years of the recovery portend a structural shift in businesses use of flexible talent management? The economic policy uncertainty cited by Baker et al. has undoubtedly played a role. Uncertainty can be good for the staffing industry. Chris Varvares, senior managing director and cofounder of Macroeconomic Advisers, said that growth in temporary and contract employment has been driven by increased uncertainty about the sustainability of the expansion. 42 Kforce Inc. chief corporate development officer Michael Blackman said, Extraordinary uncertainty among employers is leading them to utilize temporary resources. 43 But policy uncertainty or, perhaps more precisely, the uncertainty about specific policies would be cyclical in nature, rather than structural. Moreover, other trends suggest that the increasing use of staffing services is due to more than uncertainty. Data and Figure 11: Staffing Employment Growth Was More Robust in the First Three Years of Recovery From the Great Recession Than From the Previous Two Recessions. Change From Start of Recovery Monthly Temporary Help Employment Gains From the Start of Each Economic Recovery Months After End of Recession Source: American Staffing Association analysis of U.S. Bureau of Labor Statistics data Staffing Success 21

12 anecdotes point to a structural shift. Businesses are using staffing services differently in this recovery than in past ones. And that changed use presages a fundamental shift in the role of staffing services in the economy. For example, as illustrated in Figure 9, temporary help employment has grown more robustly in the three years since the Great Recession ended than it had in the same amount of time after the previous two so-called jobless recessions. Strong growth in temporary help employment would normally suggest that strong growth in overall employment would soon follow; instead, overall employment growth has been anemic in this recovery because economic growth has been anemic in this recovery. Temporary help services accounted for one in 10 jobs losses during the recession, but they have been responsible for more than 16% of net employment gains since Temporary Help Employment as a Percentage of Total Nonfarm Employment % April % December the recession ended. 44 Those are outsized effects for an industry that employs only 2% of the work force. Changes in the penetration rate the percentage of the nonfarm work force employed by temporary help firms also suggest a structural shift. Temporary help as a proportion of nonfarm employment is rapidly approaching a new record. The June and July BLS employment situation reports showed temporary help services accounting for 1.98% of all nonfarm jobs the second-highest ever, beating 1.96% in November 2005 and nearing the all-time record of 2.03% in April That was shortly before the 2001 recession, during which the penetration rate dropped to 1.64%. During the Great Recession, it fell to 1.34%, the lowest since 1994 (see Figure 12). 45 When the penetration rate breaks its record by a significant and sustained Figure 12: Since 1990, the Staffing Penetration Rate The Percentage of the Nonfarm Work Force Employed by Staffing Firms Has Mostly Ranged From 1% to 2% % November 2005 Recessions (Shaded Periods) % June & August % June & July Source: U.S. Bureau of Labor Statistics margin, that would be compelling evidence that a structural shift has occurred. Caused by what? The primary drivers for the growing use of contract talent are flexibility and the ability to quickly expand and contract the work force, as well as being able to access skills and experience that are not available internally, according to a 2011 study conducted by the Human Capital Institute. 46 Caterpillar Inc., like many U.S. companies, relies on staffing firms to stay nimble and competitive. At the end of 2011, the machinery manufacturer had 27,888 staffing employees, 18% of its total work force. Talent ranges from an engineer who has a specialized skill for a short-term project to administrative help for a specific project. Said spokeswoman Bridget Young, [We] manage our work force based on demand for our projects. 47 And, of course, the not-easily-forgotten recession has made executives cautious about adding permanent employees, said Tobey Sommer, director of equity research at SunTrust Robinson Humphrey Inc. Businesses increasingly prefer more flexible staffing arrangements. 48 The increase in employers preference for temporary and contract workers challenges policy makers to adopt more flexible mechanisms for the provision and delivery of historically employmentbased benefits, such as health insurance and retirement income, so that workers in flexible staffing arrangements have access on par with those in traditional employment arrangements. Staffing as Economic Indicator Staffing jobs are especially sensitive to the ebbs and flows of the economy. As the economy contracts, the number of staffing jobs dramatically decline. As the economy expands, the number of staffing jobs quickly rises. This is especially true when the economy pulls out of a recession, according to research 22 Special Issue 2013

13 results published by the American Staffing Association in June 2009, just as the Great Recession was ending. The research report stated this prediction: A sustained upturn in temporary and contract staffing employment would signal the end of the current recession. 49 ASA examination of employment and economic data from 1972 through 2008 confirmed that temporary help employment is a coincident economic indicator. But analysis showed that that relationship had weakened over time; it was stronger in the 1970s and 80s than in the past two decades. Further analysis, looking at the phases of economic cycles rather than merely the passage of time, uncovered an important nuance: temporary help employment is a particularly strong coincident economic indicator when the economy is emerging from a recession. Just a week after those results were published, the ASA Staffing Index bottomed in a trough (see Figure 10). The index showed that staffing employment reached its lowest point the week of June 29 through July 5, Thereafter, sustained growth in staffing employment ensued. The recession had ended (as confirmed 15 months later by the business cycle dating committee of the National Bureau of Economic Research, the nongovernmental body that ascertains when recessions begin and end). 50 The ASA Staffing Index provides a near real-time gauge of staffing industry employment and overall economic activity. It tracks weekly changes in temporary and contract employment, with results reported nine days after the close of a workweek (see Methodology of ASA Economic Surveys on pages 38 39). The weekly percentage change in employment is applied to an index that was set at 100 when publicly launched June 12, 2006, after several years of development. The baseline of 100 helps observers easily estimate how much staffing employment has changed over time. For example, when the index troughed at 66 in midsummer 2009, staffing employment had fallen about 34% from its level in mid-june The index peaked at 105 in mid-october 2007, virtually coinciding with the peak of the last economic expansion. Staffing as Employment Indicator While ASA analysis of government data shows that temporary help employment is a strong coincident economic indicator when the economy is emerging from a recession, staffing jobs are also a leading indicator of nonfarm employment. Changes in staffing job numbers usually precede changes in overall nonfarm employment (excluding temporary help) by one to two quarters. Based on the 1972 through 2008 data, the relationship was strongest with staffing jobs leading nonfarm employment by two quarters during periods Temporary Help Services 3,000 2,500 2,000 1,500 1,000 Employment, Seasonally Adjusted, in Thousands Nonfarm (Right Axis) Temporary Help (Left Axis) Recessions (Shaded Periods) of normal economic growth. When the economy was emerging from a recession, staffing jobs were a modest onequarter leading indicator of overall job growth. All things considered, staffing employment has historically been a solid leading indicator of nonfarm employment by three to six months. BLS reported a similar pattern in its data since 1990, when it began its current series on temporary help employment (see Figure 13): Peaks and troughs in temporary help services generally have led those of total nonfarm employment. Temporary help services employment reached a local high in March 1990, three months before nonfarm employment peaked; both series reached a trough in May Payroll employment in temporary help services peaked in April 2000, 10 months before total nonfarm, bottomed out in April 2003, Figure 13: Peaks and Troughs in Temporary Help Services Employment Generally Have Led Those of Total Nonfarm Employment Total Nonfarm 150, Source: U.S. Bureau of Labor Statistics 120,000 90, Staffing Success 23

14 four months before total nonfarm; peaked in August 2006, 17 months prior to total nonfarm; and again reached a trough in August 2009, six months before total nonfarm. 51 What s happened since the end of the Great Recession? BLS seasonally adjusted data (which had been used in the ASA analysis) show staffing job growth was first detected in September 2009, six months before nonfarm employment began an upward trend in March The ASA Staffing Index is not seasonally adjusted. Sustained staffing job growth started the week of July 6, Nonseasonally adjusted BLS data show sustained staffing job growth began in August, just a few weeks later. That was followed by nonfarm employment beginning an upward trajectory in February 2010, six months later. 53 The difference between ASA and BLS data whether staffing job growth started in August or September and nonfarm job growth started in February or March is a matter of seasonal adjustment. The ASA Staffing Index more closely matches the cycle tracked by NBER. Staffing and total nonfarm employment both have increased in the four years since the Great Recession ended, but why has staffing job growth been so much stronger than overall gains in employment? And for so long? Explanations are myriad, interconnected, and complicated. Some are no doubt cyclical, particularly weaker global demand and domestic policy uncertainty. But evidence increasingly points to a structural shift in work force management. Current Path of Staffing and Recruiting Temporary and Contract Jobs The ASA Staffing Index shows mostly steady growth in U.S. temporary and Figure 14: From the End of the Great Recession Through 2012, U.S. Staffing Firms Added Nearly 960,000 Jobs From a Low of 2.05 Million in 2Q09 to 3.01 Million in 4Q12. Temporary and Contract Staffing Average Daily Employment (in Millions) 3.5 Quarterly Trends * 1990 Annual Totals *Note: quarterly data collection began in Source: American Staffing Association, Employment and Sales Survey contract employment since the end of the Great Recession until the second quarter of 2013, that is, when it flattened, likely a reflection of weak GDP growth (see Figure 10 and see Methodology of ASA Economic Surveys on pages 38 39). 54 Introduced at 100 in June 2006, the index peaked at 105, where it stayed for several weeks in the fourth quarter of Then the index took its usual seasonal fall around Christmas and New Year s Days, rebounding in January 2008 to 95, about where it remained for the first half of that year, not showing the usual rise as the year proceeded. (Staffing employment is typically lowest at the beginning of the year, grows during the year, and peaks late in the year the industry s normal cycle when the economy is growing. See 2007 and 2010 in Figure 10 and quarterly trends in Figure 14.) In retrospect, it s clear that the flatness of the index in the first half of 2008 was indicative of a weakening economy. The index shows that staffing employment began to decline in the third quarter of After Lehman Brothers Holdings filed for bankruptcy in September, the index dropped rapidly. The week of Dec. 15 was telling: In what would normally have been one of the busiest weeks of the year for the staffing industry, temporary and contract employment dropped 4.6%, knocking three points off the index. By the end of the year, the index had plunged to 69, at the time its lowest value ever and 26 points lower than in June equating to a 27% loss of jobs in just six months, most of which occurred in the last six weeks of the year. The index shows that staffing employment remained virtually unchanged for the first half of But then, after bottoming out at 66 the week of Independence Day, it began to tick up. And it continued up, week after week, reaching 82 by mid-december. 24 Special Issue 2013

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16 Then, after the usual pause due to the Christmas and New Year s Day holidays, growth resumed again in 2010, with the index rising to 94 in November and December. After another holiday pause, growth continued in the first half of 2011, but the pace tapered more slowly. By August when Washington was in the heat of battle over raising the nation s debt limit the index had slipped to being on par with It peaked in December 2011 at 93. Staffing employment growth picked up vigorously in early in 2012, reaching 94 as early as May. But it then hovered around the mid-90s for most of the rest of year as the economy weakened, largely due to policy uncertainty. In the first quarter of 2013, the index suggested that staffing employment increased relative to the same period in the previous year, but its level had been mostly flat, between 90 and 95, since the second quarter of Hope springs eternal, though: the index marked a noticeable upward momentum early in the third quarter perhaps corresponding with the uptick in GDP that economists have been predicting for the balance of The ASA Staffing Index methodology corresponds with the methodology of the quarterly ASA Staffing and Employment Survey (see Methodology of ASA Economic Surveys on pages 38 39). 55 The ASA quarterly survey shows that average daily employment of temporary and contract workers declined from 3.12 million in 2007 to 2.18 million in 2009, a loss of nearly a million jobs, or 30% of the industry s work force. Figure 15: America s Staffing Companies Hired 11.5 Million Temporary and Contract Employees Over the Course of % Less Than in the Prior Year. Total Annual Temporary and Contract Staffing Employment (Millions) Year Average: Source: American Staffing Association, Employment and Sales Survey In 2010, the industry regained 401,000 jobs, bringing average daily employment to 2.58 million a year-to-year increase of 18.4%. In terms of job gains, 2010 ranked second to the historical record of 428,000 set in The 2010 rate of growth ranked third to 1993 and 1994 (just over 25% each) in the 21-year history of the ASA survey. (BLS reported a 32% growth rate in ; see Figure 9.) Temporary and contract employment growth continued in 2011, though at a more moderate pace. The industry added 212,000 jobs for an annual increase of 8.2%. The industry added 110,000 or 4.1% more jobs in From the end of the Great Recession through 2012, U.S. staffing firms added more than 969,000 jobs from 2.05 million in the second quarter of 2009 to 3.01 million in the fourth quarter of Average daily employment is really a count of the number of individuals working on assignments on a typical business day. For most industries, the daily average roughly equals annual employment. Given the generally shortterm nature of most temporary and contract work, however, there are millions more people employed in the staffing industry over the course of a year than are accounted for in the daily average. To determine annual employment in the staffing industry, ASA collects data on the number of Form W-2s issued annually to temporary and contract employees by the staffing firms that participate in the association s quarterly employment and sales survey. From that data, ASA estimates the number of temporary employees who have worked in the staffing industry during the calendar year. In 2012, U.S. staffing firms hired 11.5 million temporary and contract employees over the course of the year, an 11% decrease from 12.9 million in 2011 (see Figure 15). 26 Special Issue 2013

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18 Figure 16: The Average Staffing Employee Works About Three Months. In 2012, Employment Turnover Decreased to 294% and Tenure Increased to 13.2 Weeks Turnover Rate % Tenure in Weeks Source: American Staffing Association, Employment and Sales Survey Figure 17: Search and Placement Employment Increased by 3.3% to 272,200 in Total Annual Employment in Search and Placement (Thousands) ASA research shows that when the economy is growing normally, 53% of staffing employees who remain in the work force bridge to permanent employment. 57 If 2012 had been a normal year, more than 6.1 million former temporary and contract employees would have bridged to permanent jobs, and 43% of them would have become employees of the staffing client. Job Turnover and Tenure Staffing employee turnover markedly declined and tenure increased in 2012 (see Figure 16). Turnover is the rate at which incoming employees replace outgoing employees over the course of a year. It s calculated using average daily employment and the number of annual Form W-2s. Turnover is considerably higher in the staffing industry because most staffing employees work for their staffing firms for relatively short periods. Turnover decreased from 362% in 2011 to 294% in Tenure the duration of employment with the staffing firm is based on turnover. It had gradually increased slowly in the previous 10 years, generally adding a day or two per year to reach an overall average of about 11 weeks, or less than three months. After a sharp decrease in 2011, tenure rose to 13.2 weeks in Source: U.S. Bureau of Labor Statistics Search and Placement Jobs In addition to measuring employment in temporary help services, BLS also counts jobs in establishments that provide principally search and placement services. Jobs among executive search services and employment placement agencies together declined by 31.1% from a prerecession peak of 323,500 in 2006 to 223,000 when the recession ended in Search and placement employment has since gained 65,500 jobs a 19.8% increase through July Annual average employment grew 28 Special Issue 2013

19 3.3% from 263,600 in 2011 to 272,200 in 2012 (see Figure 17). 58 Staffing and Recruiting Sales After peaking at $98.3 billion, temporary and contract staffing sales slid 3.8% in 2008 and plummeted 24.1% in 2009 to $72.0 billion a cumulative decline of $26.3 billion or 26.8% (see Figure 18). The staffing industry s sales losses in 2009 were the biggest ever, even though temporary and contract employment in some sectors began to grow again in the middle of that year. 59 In 2010, sales increased 21.3% to $87.4 billion. In 2011, sales increased another 12.4%, coming in at $98.3 billion, which, because of rounding, appears to match the 2008 peak but in fact misses by tens of millions of dollars. In 2012, sales grew 6.6% over the previous year and reached a new record of $104.8 billion. Growth slowed in most sectors, according to Staffing Industry Analysts Inc., particularly in industrial staffing. 60 Search and placement sales peaked at $18.0 billion in 2007, according to the U.S. Economic Census conducted by the U.S. Department of Commerce. Sales declined 12% in 2008 and were then especially devastated by a 50% falloff in 2009, SIA estimated. Sales turned upward by 22.2% in 2010 and 20.3% in 2011, SIA reported. After two years of strong double-digit increases, sales growth moderated to 5.1% in Applying SIA growth estimates to the census benchmark shows that search and placement sales totaled $12.2 billion in 2012 (see Figure 19). Combining temporary and contract services with search and placement services, U.S. staffing industry sales totaled $117 billion in 2012, 6.5% more than in the previous year. Search and placement sales accounted for 10% of total staffing and recruiting industry sales, down sig- Figure 18: Temporary and Contract Staffing Sales Increased by 6.6% to $104.8 Billion in 2012, a New All-Time High. Sales (Billions of U.S. Dollars) Annual Totals Sales (Billions of U.S. Dollars) Annual Totals Search Placement Figure 19: Search and Placement Sales Increased by 5.1% to $12.2 Billion in Source: American Staffing Association, Employment and Sales Survey Sources: U.S. Department of Commerce and Staffing Industry Analysts Inc. Staffing Success 29

20 Figure 20: Total Staffing and Recruiting Industry Sales Including Temporary and Contract, and Search and Placement Increased by 6.5% to $117 Billion in Sales (Billions of U.S. Dollars) Annual Totals for Staffing and Recruiting Industry 116 Search and Placement Temporary and Contract 15% % 14% 11% % 91 10% 16% 11% % 10% 10% 12% 84% % % % % % % 2006 Source: American Staffing Association, Staffing Industry Analysts Inc.; U.S. Department of Commerce Figure 21: Nine Out of 10 Staffing Employees Would Refer a Friend or Relative to Work as a Temporary or Contract Employee, and They Are Far More Satisfied With Their Job and Their Employer Than Employees in the Overall U.S. Work Force. Total Current staffing firm, overall 42% 29% 19% Satisfied 90% Treatment from supervisors at companies where assigned Kind of work done on assignments CareerBuilder: Job satisfaction 85% % % % 32% 15% Treatment from co-workers at companies where assigned 39% 36% 17% Amount of hours assigned 39% 36% 16% 36% 35% 20% Extremely satisfied Very satisfied ASA: Would refer family relative or friend to work as a temporary or contract employee 88% yes 62% satisfied Mercer: Would recommend employer to others as good place to work 58% agree Somewhat satisfied % % % 90% % 92% 91% 91% Source: American Staffing Association, Staffing Employee Survey (see note 57) nificantly from 15% in the peak year of 2007 (see Figure 20). The Flexibility Factor Other than during the Great Recession, historically the U.S. staffing industry has been growing faster than the economy. Over the past 20 years, real GDP has averaged 2.7% growth annually. 61 In contrast, temporary and contract staffing employment has averaged 4.6% growth per year, and sales have averaged 8.3% annual increases. 62 Why? It s because of the flexibility factor: employees want it, businesses need it, and it s good for the economy. Employees Want Flexibility America s work force has been changing. Workers are increasingly looking for flexibility in their employment arrangements. In a landmark ASA survey of staffing employees, two-thirds said flexible work time was an important factor in their decision to become a temporary or contract employee; nearly one-quarter of survey participants said it was an extremely important factor. More than half said time for family was important; one in five said that time for family was extremely important. 63 One in four respondents had little or no interest in a permanent job. They worked with staffing firms for lifestyle reasons. Surveys conducted by Kelly Services Inc. show an increase in the free agent work force individuals who consult; perform temporary, freelance, or contract work; or have their own business from 26% in 2008 to 44% in Kelly president and CEO Carl Camden acknowledged that some of the increase is due to a weak hiring environment, but said, Today s workers desire more flexibility and freedom in the way in which they work. 65 A 2013 survey by staffing firm Mom Corps found that 45% of U.S. working adults would be willing to relinquish at 30 Special Issue 2013