What a Possible Recession Means for Your Staffing Firm
Last time updated: 3 August, 2023
Last time updated: 3 August, 2023
Last updated on August 3rd, 2023 at 06:37 pm
In light of the long-term global health crisis of COVID-19 and the accompanying economic uncertainty, many economists and analysts predicted a recession could be imminent. The continuing cycles of new COVID variants make the future unpredictable and wreak havoc on the US economy.
After a long period of recovery and job growth since the Great Recession of 2008, the tide may be turning. We currently live in uncertainty and are experiencing troubling economic factors: a global pandemic, Federal Reserve interest rates at zero, an oil price war, and turmoil over the U.S. presidential election. With recession fears looming, what goes up must eventually come down.
A recession is bound to happen at some point because that is the nature of business cycles. It is worth it for staffing agency owners to consider what a possible recession means for staffing, how to weather the storm, and what can be done to prepare.
The Great Recession of 2008 is still fresh in the minds of many business owners. We survived a cumulative decline of 5.1% in GDP as a country, saw 8.7 million jobs disappear, hiring freezes, and discouraged job seekers. 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 relatively quickly compared to other ones, reaching pre-recession 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.
Despite all of our data and knowledge, recessions are still tough to predict. Since World War II, there have been 11 recessions. The latest economic expansion we are in began in mid-2009, making it the third-longest growth in history. Unfortunately, good times cannot last forever, and many economists predict a recession within the next two years.
Even for the most optimistic among us, there are some concerns on the horizon. Namely:
A double-dip recession is an economic downturn where a small recession is followed by a short recovery period, then quickly another recession, usually worse than the first. This can also be called a W-shaped recovery. Double-dip recessions are often caused by repeating crises, or by government policies that deliberately or inadvertently slow economic growth.
The staffing industry is often the first to feel the effects of a recession, and the first to recover as hiring increases. A double dip recession is likely to cause a “false spring” for staffing where contingent workers return to work, followed shortly by more job cuts and losses.
Preparing for a double dip recession involves the same principles as preparing for a regular recession: Focus on your strengths, make sure your customer mix is diverse, and have a strong internal team, to name a few.
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 – such as global pandemics – can also curb growth and throw the economy out of whack.
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, or even social media influencing.. 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.
So what is a recession’s impact on staffing? 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 morale, 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 looking to cut back on benefit payments.
The short answer is, it depends on the industry. Is recruiting recession proof as a whole? Not necessarily, but some companies are hiring during a recession. For instance, health care companies, government, IT/Technology, and education are a few industries that might be considered “recession proof.”
Temporary labor in a recession can be described as FIFO: first in, first out. Flexible labor is first out the door at the beginning of an economic downturn and the first ones back in when recovery starts.
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.
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 in companies that 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. It is worth looking into specialty funding like 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.
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