Staffing shares have further to fall

By Nick Zieminski - Analysis

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.