Since the end of 2022, the fortunes of the US economy and those of the staffing industry have dramatically diverged. Where in prior decades, movements in staffing were considered a useful leading indicator of the trajectory of the overall economy, as recession fears abated over the course of 2022 and 2023, staffing continued to decline. A phrase I generally loathe for inaccurate use and over-use is instead appropriate: This time is different.
However, while the staffing industry’s historical relationships with gross domestic product and overall employment have not held since mid-2022, the break between staffing and the rest of the economy is not complete. Data reflective of specific client verticals suggest answers to why recent experience has proven so unusual as well as when we might expect renewed growth.
The root of the malaise for industrial staffing appears to be the stagnation of the manufacturing sector (in the US and globally) as well as declines in transportation, warehousing and logistics activities which stem from both that weakness in manufacturing and the continuing unwinding of their pandemic surge.
These client verticals are moderately interest-rate sensitive through multiple channels. Higher interest rates increase the cost of credit and decrease its availability, lowering buying power for big-ticket consumer goods such as vehicles, furniture and appliances, as well as housing, sapping demand from these markets and lowering production activities. Similar dynamics apply to business investment — borrowing costs rise and balance sheets suffer while simultaneously funds flow away from risky assets, lowering the relative attractiveness of equity and venture funds. Finally, higher interest rates increase the value of the dollar, making US exports more expensive for foreign buyers while simultaneously making imported goods more affordable for US buyers, reducing the market for US-manufactured products.
With inflation trending towards the Federal Reserve’s 2% target, interest rate cuts are widely expected over the course of 2024. The median federal funds rate implied by application of a suite of monetary policy rules to macroeconomic forecasts by the Federal Reserve Bank of Cleveland suggests the benchmark rate could fall to 3.9% from the current 5.3% by the end of the year. As interest rates decline, the mechanisms outlined above will reverse, shifting from an impediment to a tailwind for these client verticals, which should then support a return to growth for industrial staffing in the latter half of the year.
Additionally, despite the interest rate environment, factory investment reached an all-time high in 2023 and remains elevated in early 2024. This surge in investment reflects the US embrace of industrial policy as enacted in the CHIPS and Science Act and the Inflation Reduction Act. The subsidies and investment programs contained in these laws target specific industries — and so the surge in factory construction is heavily concentrated. From 2018 through 2020, computer, electronic and electrical equipment manufacturing facilities represented 10% of factory investment. In 2023, they accounted for 54%. Some of these facilities are expected to come online late in 2024, and others will follow over the next few years. Their workforce needs will provide new and expanded opportunities for industrial staffing.
Continued economic growth, interest rate cuts and factory openings will provide support for industrial staffing, with the extent of support increasing late in 2024 and into 2025.
