(TND) — Temporary employment is dropping and could signal tougher economic times are ahead.
James Knightley, chief international economist at ING, said temporary jobs are a bit like a "canary in the coal mine." Changes with temporary jobs have historically been good indicators of wider changes in employment, he said.
Temporary employment declined by 35,000 in December and has fallen by 111,000 since July, according to the Bureau of Labor Statistics.
The unemployment rate, however, remains at its lowest level in decades. It now sits at 3.5%.
Knightley said don’t be lulled into a sense of safety with the low unemployment rate, noting that the labor participation rate is also low. That’s about 62%.
“I'm not necessarily worried about the level that we're starting from, but yes, I do fear that the unemployment rate is going to rise,” he said.
Knightley said the Federal Reserve is forecasting the unemployment rate to rise to 4.6% this year as it keeps pressure on high inflation.
Companies tend to cut temporary workers before cutting their permanent staff, Colorado State University economist Stephan Weiler said.
“The temp workers are usually the first to go,” Weiler said. “Last in, first out.”
Turnover is expensive, but shedding temporary workers doesn’t carry the same financial risks for companies.
Knightley also said companies are hesitant to lay people off, knowing it could cost them more to add workers back when the economy turns around.
But he said there are some concerning trends now with the economy.
Residential construction has fallen for six consecutive months, he said.
Industrial production has fallen for three straight months.
Retail sales have fallen for two straight months.
And temporary employment is riding a five-month decline.
December’s drop in temporary employment was its biggest since early 2021.
There is a bit of a disconnect in the labor market.
“This is sort of very much in flux right now,” he said. “Where five, six months ago everything was pointing in the same direction, in that you've got very tight jobs market. Everyone is hiring across all sectors. Now we're not seeing that so much. It's very much sector by sector.”
The U.S. is adding roughly 200,000 jobs a month. And competition remains tight especially in the lower pay ranges.
Just the other day, Walmart signaled it was having a hard time finding help when it announced a hike in its starting pay.
But Knightley said more companies are taking a defensive posture.
The labor market is the last thing to turn in any economic cycle, he said. And the drop in temporary labor could signal a turning point.
“That sort of sentiment just permeates the whole economy over time,” he said.
Knightley referenced the pessimism expressed by executives in the recent survey from the Conference Board.
Nearly all executives, 98%, said they were preparing for a recession in the U.S.
“Their CEO sentiment survey 8-9 months ago was at all-time highs, and this service goes back decades and decades,” Knightley said. “Fast-forward to today, and it's the lowest since the global financial crisis.”