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Declines in temporary employment signal possible trouble for broader economy

American businesses are shedding temporary workers, a sign that a robust US jobs market may be weakening and the odds of a soft landing for the economy may be diminishing.

While the overall US workforce added 216,000 jobs in December 2023, the number of temporary workers fell by 33,300. That marked the 13th time in the previous 14 months that the ranks of temporary workers tumbled, according to the latest US government jobs report.

Since peaking in March 2022 at nearly 3.2 million, the number of temporary employees in the US has fallen about 10.9% to 2.8 million in December 2023. A drop in temporary hires tends to precede recessions and could signal trouble for hopes of a soft landing while the Federal Reserve prepares to loosen monetary policy as inflation growth nears the central bank's 2% target.

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"Historically, the temporary help component is viewed as a leading indicator," said James Knightley, chief international economist at ING. "They are easy to hire, so if you are tentatively thinking about expanding your workforce you may choose this option first. When you are looking to cut costs, they are easier and cheaper to fire than permanent employees so they lead on the downturn."

Signs of a slowdown

Overall job creation grew by an average of 2.3% each month in 2023, but temporary jobs declined by an average of 4.9% each month, according to the Bureau of Labor Statistics. While overall hiring continues to rise and the broader labor market appears tight, the ongoing decline in temporary help is "one of the telltale signs of slowdown," said Shannon Seery Grein, an economist with Wells Fargo.

"Demand for labor has softened," Seery Grein said.

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The number of job openings in the US has dropped about 27%, or more than 3.2 million, since hitting its high point in March 2022. Small businesses have slowed hiring plans and the rate of employees quitting has fallen to 2.2%, 80 basis points below the peak of quitting in April and roughly in line with pre-pandemic levels.

Companies tend to slow hiring of temporary workers before laying off full-time employees and boost hiring temporary help before expanding their permanent workforces.

"The slowdown in temporary hiring is a sign of moderation and suggests we may be in store for a bit more of a slowdown in broader hiring to come," Seery Grein said.

The decline in temporary employment is likely a reflection of a decline in demand for labor, but that decline is not being felt in all sectors, said Nancy Vanden Houten, lead economist at Oxford Economics.

"It's worth noting that job growth over the last several months has increasingly been driven by jobs in healthcare, leisure and hospitality and state and local government," Vanden Houten said.