Staffing shares have further to fall

NEW YORK (Reuters) - The ranks of temporary workers continue to shrink, which suggests shares of staffing companies have further to fall.

Many U.S. employers use temporary workers as a way to adjust their staffing needs, so temp-worker payrolls typically fall ahead of a wider jobs market downturn and rise at the start of an uptick. Right now, they are falling.

The temporary jobs sector lost 37,000 jobs in August, after shedding 24,000 jobs in July and 36,000 each in May and June. Seasonally-adjusted temporary payrolls are down 9.1 percent from a year ago and the rate of year-over-year declines has accelerated over the past three months.

"We tend to be a leading indicator," said William Grubbs, executive vice president and chief operating officer of Spherion Corp (SFN.N).

"I would expect to see a bottoming in the staffing industry before I'd start to see the general employment market improve," Grubbs said. "We're not seeing that at this point."

The data on the sector was part of Friday's weaker-than-expected government report that showed job losses in almost every employment category and an unemployment rate of 6.1 percent, the highest since September 2003.

An index of staffing stocks, the Dow Jones U.S. Business Training & Employment Agencies index .DJUSBE, was down 1 percent Friday and is down about 27 percent over the past year, versus a 16 percent drop in the broader S&P 500 .SPX.

But the staffing index has rallied since the second-quarter earnings season, suggesting some investors expect the worst is over. That optimism may be premature.

Temporary payrolls are down some 11 percent from their peak in December 2006, while shares have lost about a quarter of their value. By comparison, payrolls dropped by 20 percent from the peak in the previous downturn, and stocks fell by more than half, according to Merrill Lynch.

"Staffing stocks do not have sustainable rallies until temp payrolls have bottomed," Merrill analyst Michael Morin said.

Temporary workers account for 1.7 percent of the total U.S. labor force, the lowest since June 2003, a metric that suggests an oncoming recession, BMO Capital Markets analyst Jeffrey Silber said in a research note.

Citigroup on Friday downgraded shares of Robert Half International Inc (RHI.N) and Kelly Services Inc (KELYA.O) to "sell" from "hold" and cut its earnings estimates for Manpower Inc (MAN.N), citing worsening U.S. and European jobs data and a stronger U.S. dollar.

Manpower, which will release its fourth-quarter hiring outlook next week, is rated "hold" or "underperform" by 11 analysts, while four rate the stock "buy" or "outperform."

BAD NEWS BEARS

To be sure, widespread pessimism may itself be a contrarian signal, and history is not always a reliable guide.

Staffing executives have indicated continued demand for workers with professional skills like technology and accounting, and stress that the professional jobless rate is less than half the overall unemployment rate.

"I don't think the economy is as bad as everybody says it is," said Spherion's Grubbs, who has 25 years' experience in the industry. The current downturn "doesn't feel as deep" as in the recessions of 2001 and 1991, he added.

But the bears still have plenty of evidence for their case. Professional payrolls are falling, and the unemployment rate for college graduates jumped last month to 2.7 percent, from 2.4 percent. Other indicators also point to further weakness.

A Monster Worldwide Inc MNST.O index of online hiring activity is down about 14 percent from a year ago, the fourth straight double-digit drop. And outplacement firm Challenger Gray & Christmas reported 88,000 job cuts in August, saying the summer of 2008 marked the highest total of job cut announcements since 2002.

Meanwhile, slowing job markets outside the United States may also weigh on stocks like Manpower, Hudson Highland Group Inc (HHGP.O), and Heidrick & Struggles (HSII.O) which generate half or more of their sales overseas.

Manpower and Monster Worldwide recently warned international demand was slowing. Kelly Services, where about one-third of revenue is from offshore, has stopped forecasting earnings because of economic uncertainty.

"Europe is starting to weaken now," said Stephen Laveson, senior analyst with Becker Capital Management in Portland, Oregon, which owns about 450,000 Manpower shares and has been buying on recent weakness.

Price concessions are inevitable in a weak market, Laveson said, but since European staffing markets are less fragmented profit margins do not shrink as quickly for companies with European exposure.

Tig Gilliam, who heads U.S. operations for Swiss-based staffing giant Adecco SA (ADEN.VX), said: "I think we're going to have a longer (cycle) this time, but it's also been shallower."

Government numbers may seem a little worse than they really are, he said, because they do not reflect temporary jobs that have been converted to permanent ones.

Still, while hiring in professional fields remains "decent," it is not growing, and professional payrolls need to rise before the overall job market recovers.

"The recovery hasn't started yet," Gilliam said. "We're going to see more of the same for the rest of this year."

(Editing by Leslie Gevirtz)