What a Possible Recession Means for Your Staffing Firm

Recruiting & Hiring During a Recession

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.

How the last recession affected the job market

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.

How the last recession affected the recruitment industry

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, andskills 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 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:

• COVID-19 – COVID-19 caused the stock market to dive steeply in 2020 and had investors worried that the pandemic’s disruptions to the economy could be more severe than expected. Even with vaccines and treatments, new variants such as Delta and Omicron make the pandemic a lasting reality.
  Inflation and rising interest rates
• Inflation and rising interest rates – While 2021 saw low interest rates and over $1 trillion pumped into the economy via the Federal Reserve, rising inflation means that rate hikes are likely in 2022. High inflation and then rising rates can be a sign of a coming recession.
• US political uncertainty – The results of the 2020 U.S. presidential election has left some investors uncertain about what economic policy and potential tax hikes will look like moving forward. Uncertainty sometimes discourages risk-taking and capital spending.

Could We Experience A Double Dip Recession?

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.

How Does A Double Dip Recession Affect Staffing Firms?

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.

How Can Staffing Firms Prepare for A Double Dip Recession?

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.

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 – such as global pandemics – can also curb growth and throw the economy out of whack.

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, 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.

Top Ways You Can Prepare Your Recruitment Agency for a Recession

• Diversify your client roster – Make sure the companies and industries you serve are diverse. If you are only staffing one sector, you could take a larger hit.
• Work with reliable companies – small clients can be more fragile during an economic downturn.
• Know what resources are available to you – Open lines of credit, grant resources, PPP loans, and more. All these allow you to retain employees and make your agency recession-proof.
• Refine your hiring process. Improve job postings, choose qualified candidates with experience and employees with a wealth of knowledge. Hiring top talent and quality candidates with vast experience will ensure you can cover multiple skillsets during hard times.

What happens to the staffing industry in a recession?

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.

Does Hiring Always Decrease In A Recession

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

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 Key to Surviving a Recession as a Staffing Firm

• Find Other Ways to Help – If no one is hiring, what core competencies can your staffing business offer? Can you help with resumes and outplacement? Can you offer your clients advice on staffing or recruiting? Don’t be afraid to shift gears or think outside the box to keep your business going.
• Manage Your Roster Wisely – Your staff is the most important asset your business has. Unfortunately, it is also your highest cost. Be honest and be transparent, but sometimes layoffs are the only way to survive. The best thing you can do is be strategic about who stays and who goes, thinking forward to who can help you when the economy turns around. And if you received a Paycheck Protection Program loan to prevent layoffs, be sure to understand the forgiveness rules. It is probably wise to seek legal or accounting help or both.
• Practice What You Preach – Many staffing firms equip themselves for economic volatility by using flexible labor themselves. If a certain number of your recruiters are contingent workers, you can more easily scale down and back up to adjust to swings in demand, just as your clients can.
• Watch the “Danger Zone” – Despite what you might think, the most challenging period for staffing firms is not the beginning or the middle of a recession; it’s the end. As business gradually improves, growing your headcount will suck cash out of your business precisely when you are likely to be in your weakest position to fund growth. Having enough working capital available during growth periods is extremely important.
• Update Your Business Plan and Budget – As the pandemic and response unfold, things are changing fast. Some of you have orders to fill because specific industries are booming, other of you have candidates and no demand. You need to refresh your business plan and budget to update this current reality and visit it often.
• Request Better Terms – In a recession, cash is king. Talk to your current clients regarding payment terms because better collection equals more cash on hand to cover emergencies and keep the doors open.
• Diversify your verticals – If you are currently struggling during this downturn, consider what verticals are not. It might be worth it to expand your offerings to turn a bad situation into an opportunity.

 

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 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.

What Matters Most In A Recession

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.