A Little-Known Early-Warning Signal Lets Out A Yelp

A Little-Known Early-Warning Signal Lets Out A Yelp
Stéphane Renevier, CFA

about 1 month ago1 min

Temporary jobs are a canary in the coal mine where the labor market is concerned. When companies sense growth, they boost their temp staff as a first step, and when they sense a slowdown, they tend to slash those job costs first.

That’s what we’ve seen playing out recently in the key US monthly jobs data, and it’s a worrying sign. See, when interest rates rise sharply, as they’ve done in the past year, the effects ripple across the economy in waves, and the employment sector is typically the last to feel the brunt. And as you can see in the chart, dips in temp jobs (red arrows) often happen just ahead of a recession (gray-shaded areas).

That’s because, as job numbers start to tumble, wallets snap shut, and the decline in consumer spending hits company profits, nudging firms to tighten belts and hand out more pink slips, fuelling a negative cycle.

I mean, let’s not get ahead of ourselves: maybe this hiring hiccup is just the market’s way of chilling out after running too hot, in line with the Federal Reserve’s master plan of using interest rate hikes to cool inflation without deep-freezing the economy. If that’s the case, we could be cross-country skiing toward the recession-free soft landing we’ve all been daydreaming about.

But in case we’re not: it’s worth keeping an eye on things, and that includes temp hiring. Remember, many a rough recession was once disguised as a gentle descent. So, keep your optimism, but keep your wits about you too, ensuring your portfolio is braced for potentially tougher times ahead.



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