Here is how I view employment: When margins get squeezed and sales slow, one of the first ways businesses respond is by slowing down temp hiring. Then, as trends continue to worsen, businesses start to let go of their temp employees altogether while cutting hours on their full-time staff. Finally, if the slump continues, businesses must eventually resort to layoffs, which can lead to a recession.
Here's how we saw this play out in terms of temp jobs just before the last two recessions:
Looking at the current backdrop, temp jobs are stalling again.
Year-over-year, the growth rate in temp employment shows it turned negative before the last two recessions and it isn’t far off from doing that again.
Employers are already moving on to the next phase in the labor cycle by cutting back hours of full-time employees:
We have yet to see overall payroll growth turn south. It has slowed to only a 1.9% annual rate but that meager growth rate still rests near the highs of this and even the last cycle….BUT one of my favorite indicators for employment are bank lending standards for large and medium firms (shown inverted below in red). As banks tighten, payroll growth eventually begins to slow and the recent tightening we have seen suggests payroll growth takes a sharp turn south in 2017.
So, while the markets are holding in very well and oil is breaking out, I have a feeling we are still in for some rough waters ahead if these trends continue. On Friday we'll receive the widely-watched nonfarm payroll report. Though I won't try and predict which way it'll move in the short-term, the message coming from temp jobs and bank tightening currently shows risks increasing for layoffs in the quarters ahead.
We'll be discussing our broader outlook in more detail at this month's Investment Strategy Conference in San Diego, CA, which is free to the public. This year's theme is "Approaching the Peak and the Next Financial Crisis." If you would like to attend, click here for more information.
All charts courtesy of Bloomberg
