Jobs Report Not as Bad as You May Think

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NEW YORK ( TheStreet) -- If there's one corporate sector that should have a pretty good handle on the job market, it's staffing companies, and they don't see what the markets see in August's weak jobs number.

On Friday, the nonfarm payrolls report showed no net new jobs created. Yet the staffing companies insist that the markets are pricing in a much worse employment outlook than the pound-the-pavement hiring reality indicates.

The key line item for staffing companies in the Bureau of Labor Statistics report -- temporary services -- was actually revised up for both July and August.

Jeffrey A. Joerres, chairman and chief executive officer of ManpowerGroup

"It's hard to read a double dip into the numbers," said ManpowerGroup ( MAN) Chairman and CEO Jeffrey Joerres, though he allowed, "It's flattening and at a critical point, and we could see this flatten out for a while and be in a tepid growth environment."

The temporary services line item in the nonfarm payroll data has ranged between 6% and 8% growth this year, which borders on a stall compared with last year.

R.W. Baird & Co. analyst Mark Marcon said the reason for concern is that even if temp hiring remains up, it's fallen off so much. Previous to the revisions, the temp services sector had been in decline for several consecutive months.

"Temp services was really good year last year, and since February, we've stalled out in terms of material sequential gains," the analyst said.

Deceleration in hiring has occurred -- and it was already occurring before the latest jobs data.

The Baird analyst said that Manpower's U.S. growth showed signs of deceleration in the recently reported second quarter, well before the latest jobs report. Manpower's CEO noted that the company revised down its revenue outlook for both the U.S. and the global business when it reported second quarter results. Baird's Marcon said part of it is the cyclical nature of temp hiring, which tends to crest in the earlier part of a business cycle in sectors including light industrials and clerical work.

Still, if the latest labor data don't suggest a double dip, the numbers don't rule one out either.

"We've hit a soft patch. In the very short term, it's anyone's bet. We could see it go either way," said Manpower's Joerres.

And this uncertainty is reflected in the shares of companies in the staffing sector, including Manpower, trading near 52-week low levels.

The disconnect between the market and staffing sector view is partially a byproduct of a different ways of gauging the labor market. The staffing companies are focused on what they can take away from current conversations with clients.

"We don't see clients, big, medium or small, speaking to us like they spoke in 2008, when they were saying, 'This is going to hurt.' They are adjusting on margins and being cautious but ... there is no death and despair, and to me that's a positive," said Manpower CEO Joerres.

Baird analyst Marcon said, "These companies have three to five weeks of forward visibility, whereas the market is looking ahead six months, and the disconnect is in what the market is fearful will occur in the future vs. what's right in front of these companies."

Manpower, which derives a majority of its revenue in Europe, also has to contend with fears related to the European sovereign debt crisis. Manpower's Joerres said, "The equity markets are placing their bets that macro indicators will have a big impact on the labor market but we are not seeing nor anticipating it. We are seeing slow to moderate growth and don't anticipate big shockwaves."

Michael Blackman, chief corporate development officer at Kforce ( KFRC), which specializes in IT staffing, said that while the labor number on temporary hiring looks weaker, it doesn't show the market the bifurcation that is taking place in the labor market for skilled vs. nonskilled workers.

"If you're highly skilled, you can take your pick of where you want to work. There are more openings than people. We continue to see an unprecedented degree of bifurcation as manifested by demand for highly skilled vs. unskilled workers," Blackman said.

If demand continues, albeit a bit softer, Kforce's optimistic outlook is shaped in part by being an IT specialist, where the current hiring dynamic is strongest. IT projects are leading demand because they have a longer cycle. Companies don't stop major IT projects midway and are generally committed to efficiency investments, noted Manpower's Joerres.

Blackman conceded that Kforce can grow organically without the economy adding new jobs, as highly skilled workers in IT move from one company to another, and added that the recent unemployment numbers have shown half to be college educated unemployed. "The Dartmouth graduate with the English literature degree is a waitress today."

Still, both Manpower and Kforce are betting that the general uncertainty in the markets and among corporate leaders won't lead to a complete halt in hiring, but ultimately bring more hiring requests to their desks, as corporations increasingly turn to a flexible hiring model.

"Given the economic, political, regulatory, health care, tax and budgetary uncertainty, clients appear to be increasingly turning to flexible staffing solutions to mitigate uncertainties," Kforce's Blackman said.

"They've done it with inventory and supply chains and are now working on it from the talent perspective, and as an industry we are the answer to it," Joerres said. "We are optimistic about the future because companies have to remain agile and incredibly fast in their ability to turn on or off hiring and that gives us a positive feeling," the Manpower CEO said.

If the more flexible hiring paradigm is taking place, Marcon stressed that not even it can trump a severe downturn in the economy.

"We need a certain amount of fundamental growth for these companies to do well, Marcon said. "If we get cautious growth, a situation where there is growth but everyone is still feeling slightly uneasy, that's good for these guys. Still it's certainly not the funeral business. Companies are always hiring and firing and there is churn in the labor market, but margins for these companies can be thin and when there is significant fluctuation in the top line it spills over to the bottom line quickly," the analyst explained.

If the 52-week-low levels near which the staffing stocks are trading is not an indicator of a recession on the way, it's at least an indicator that the market fears this and that the stocks are discounting current Wall Street estimates as being too high.

"We work best in a good economic environment, and this is soft and companies have adjusted their thinking to use us more. This is a positioning game, and when more robust growth returns, we should be able to take advantage. In the meantime, things aren't terrible," said Manpower's Joerres.

If things aren't terrible, according to the jobs experts, you could have fooled the markets.

-- Written by Eric Rosenbaum from New York.

>To contact the writer of this article, click here: Eric Rosenbaum.

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