What a Possible Recession Means for Your Staffing Firm

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Although stock market fluctuations and trade wars have caused some anxiety, in general the American economy is doing well. We have seen a record 92 consecutive months of steady job growth as of June 2018, the longest such streak on record. The Trump administration has enacted business friendly policies like a massive corporate tax cut, and growth in the staffing industry has outpaced overall economic and employment growth. All of this to say, economic optimism is high.

But what goes up, must also come down.

A recession is bound to happen, because that is the nature of business cycles. And it might be coming sooner than we think. It is worth it for staffing firm owners to at least consider what a possible recession means for staffing, and what can be done to prepare.

The last recession

The Great Recession of 2008 is still fresh in the minds of many business owners. As a country, we survived a cumulative decline of 5.1% in GDP, and saw 8.7 million jobs disappear. It took almost five years to recover the jobs lost during the 18 months of the Great Recession. In terms of the staffing industry, US staffing revenue declined 28% in 2009 and more than a third of staffing employees lost their jobs. The industry bounced back fairly quickly compared to other ones, reaching prerecession highs in 2011 and 2012. The rest of the economy did not recover fully until 2014. Staffing revenue has grown ever since as a tightening labor market and skills gaps made such services even more in demand, and as of recently we have nearly doubled revenue since the dip in 2009.

Is a new recession coming soon?

Despite all of our data and knowledge, recessions are still very hard to predict. Since World War II, there have been 11 recessions. The current economic expansion we are in began in mid-2009, making it the third longest expansion in history. Unfortunately, good times cannot last forever and many economists predict a recession within the next three years.

Even though the outlook is bright, there are some concerns on the horizon. Namely:

  • Possible trade wars
    The new trade war with China will likely have significant negative impacts to the US manufacturing sector. Proposed steel and aluminum tariffs on Canada, Mexico and the EU also could dampen economic growth.
  • Rising interest rates
    The Federal Reserve has been vocal about their plan to gradually increase interest rates through 2018 and 2019 in order to combat inflation and keep the economy from overheating. It can also means less spending, and an inadvertant damper on economic growth.
  • A tightening labor market
    The unemployment rate is at its lowest level since the 1960s, and labor is scarce. Staffing companies know all about the tight labor market and a widening skills gap. Combined with rising interest rates and lower spending, it can be a cause for concern.
  • Stock market corrections
    After a relatively calm year, the volatility in the stock market has returned in 2018. While overall the stock market is strong and bullish lately, we have seen some wild swings in the stock market that have some investors nervous. Recent trade disputes also contribute to the tension.

The conditions of a recession

Recessions happen because labor grows scarce and wages climb, which prompts businesses to ease back on hiring. Meanwhile, the Federal Reserve raises interest rates to quell inflation, which essentially puts the brakes on the economy. Geopolitical shocks can also curb growth, and some worry about rising tensions abroad, especially with North Korea.

With the recent passage of President Trump’s tax bill, some economists worry that a deficit financed tax plan could have unintended negative consequences. The extra dollars in the hands of the people could “overheat” the economy and cause inflation, and with it even more rising interest rates. Inflation is also a concern when our unemployment rate is below 5%, which it has been for about two years now. While we do not know exactly what will cause the next recession, there are causes for concern.

Why the next recession could be worse

Historically, the longer that goes between recessions, the worse it is for the American public. As previously stated, we are in the midst of the third longest economic expansion in recent history. A few factors make the next recession a cause for concern, beyond just the regular concerns of job security and financial stability.

One factor that could contribute to a worse recession is that unemployment insurance is harder to get than ever before. During the massive layoffs of the Great Recession, Congress increased the duration of unemployment benefits beyond 26 weeks that states provide. Since then, Congress has allowed those benefits to expire and many states have cut their unemployment programs or made it harder to get or keep them with additional requirements and scrutiny.

Another unique aspect of the next recession will be the prevalence of alternative work – aka temporary jobs with no benefits, such as driving for Lyft or Uber. 16% of the workforce currently takes part in alternative work, or gigs, and in a recession that is likely to grow. The people working such jobs may also be ineligible for unemployment, since if they’re not actual employees of the firm they work for their state won’t have W2 forms on file reflecting their earnings.

What happens to staffing firms in a recession?

Temporary staffing is a fairly solid indicator of where the economy is headed, as trends in the employment of temporary workers presage shifts in general employment. So once temporary work starts dropping, other job losses are likely to follow.

The main reason that companies use staffing firms is flexibility. So in a recession, often the first costs to go are contingent workers. It is less of a blow to moral, and there are no severance or separation packages to deal with. On the flip side, staffing firms are also relied on for affordable labor when a company is looking to cut back on benefit payments.

During a recession, temporary worker levels will most likely drop. However, when recovery starts, you will most likely see a boom as companies start to test the waters with temporary help.

What to do about it now?

The best thing to do in an environment where a recession seems imminent is to keep tunnel vision on your business. Rather than trying to time the market, focus on what you do best: helping place talent to businesses who need it. While there is not a lot you can do to plan for a recession, it might be prudent to consider how your business would approach various revenue scenarios, such as a 20-30 percent downturn if a recession were to hit.

You also have to consider whether your staffing firm has enough liquidity on hand to weather a crisis. A line of credit with a bank is one option, but in an environment where the Federal Reserve is planning to raise interest rates, it might not be the best time to go that way. In a prerecession environment, it is worth looking in to specialty funding such as invoice factoring to improve your cash flow. Payroll funding companies are not subject to the same government oversight as banks and do not require as much scrutiny. For some staffing firms, specialty financing might be the better way to go.

For a more in depth look at staffing firms and recessions, download the free whitepaper The Staffing Firm Guide to Navigating a Recession.For more information on payroll funding, request a free funding consultation today. If you have a specific question regarding your staffing firm, email our resident staffing industry expert Barb Hammerberg, CCWP directly at AskBarb@advancepartners.com.

 

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About the Author
Adam Stern is the Senior Director and General Manager at Advance Partners. During his tenure starting in 2002, Advance has grown from approximately 15 employees and 50 staffing firm clients to more than 160 employees and more than 400 clients. Adam has overall P&L responsibility for the business and and works to set the strategic direction and vision of the company. Read full bio