While industrial staffing remains about as weak this year as last, it remains unclear when a Fed rate cut could come and provide a boost.

Industrial staffing revenue is forecast to decline by 5% this year, according to the US Staffing Industry Forecast: March 2024 Update report by SIA. Weakness was seen continuing through the first half of this year before yielding to a slow recovery.

Key inputs to this base case were macroeconomic forecasters’ expectations for manufacturing and industrial production, themselves contingent on the timing and pace of interest rate cuts. At the time, financial markets anticipated that the Federal Reserve would begin lowering interest rates by May 2024. Likewise, Federal Reserve officials themselves anticipated three rate cuts over the course of the year, as indicated in the Fed’s March 20^th Summary of Economic Projections, which at an every-other-meeting pace suggested the first cut to occur in May or June. At the time of this writing, the June FOMC meeting is underway.

In the months since our forecast, inflation has remained elevated with year-over-year inflation as measured by the personal consumption expenditures price index averaging 2.6% and annualized month-over-month inflation accelerated, averaging 3.7% over the past three months. The Federal Reserve’s target is an annual inflation rate of 2%.

With the overall labor market remaining strong, the Federal Reserve has prioritized combating inflation, and the timing and pace of interest rate cuts are unlikely to match expectations from early in the year. Financial markets, forecasters, and fed watchers now anticipate rates will remain steady until September, while some predict no rate cuts at all during 2024. I am sympathetic to this more-pessimistic outlook. A key contributor to the current inflationary environment is housing costs. While most categories of goods and services prices lose steam when facing high interest rates as interest costs constrain budgets and sap demand, there is evidence that housing supply is more interest-rate sensitive than is housing demand. As so, a decline in new housing construction facing relatively unchanged demand sees housing prices rise further, and given housing costs’ high share of Americans’ expenses, this worsens and prolongs overall inflation.

Industrial staffing’s major client industries, manufacturing, transportation, and warehousing are all interest-rate sensitive through multiple channels, as discussed in the March 2024 Industrial Staffing Report, and these knock-on effects of elevated interest rates appear to be a main factor behind their subdued performance — and thus their low demand for staffing services.

Manufacturing overtime hours are a particularly useful indicator of the demand environment for industrial staffing. Strong growth in overtime corresponds to a supportive environment for industrial staffing, as shown on the chart below.

Q/Q Growth in Manufacturing Overtime Hours and Temporary Help Services Employment

Source: SIA and US Bureau of Labor Statistics. 

After the first quarter of 2022, overtime hours have either declined outright or mustered only weak and sequentially reversed growth. Aggregated hours across all of manufacturing, transportation, and warehousing have likewise been lackluster, with uninterrupted decline every quarter since the second quarter of 2023. On a brighter note, data for April and May suggest 2024 Q2 may see a return to growth in this area, and as visible in the chart, manufacturing overtime grew in 2024 Q1 and into Q2. If sustained, these developments may provide support for industrial staffing later this year.

Thus far into 2024, industrial staffing remains about as weak as it was in 2023. Both our Pulse Survey and the SIA | Bullhorn indicator suggest stable-to-improving year-over-year comps for industrial staffing. The SIA | Bullhorn indicator for commercial staffing recovered from its January slump and stabilized near -13% year over year since March. Similarly, the Pulse Survey finds year-over-year aggregate revenue comps remain negative but are slowly trending towards even, and the median respondent reported slightly positive year over year industrial staffing revenue growth in April. Unfortunately, it is likely these observations primarily reflect easier comps.

Should manufacturing snap out of its worldwide malaise, particularly if it experiences a rapid rebound, demand will return for industrial staffing services. Export-oriented manufacturers and consumer durables manufacturers (as furniture, appliances and vehicles are typically financed) and the logistics operations that serve their operations and supply chains may be the first to benefit from interest rate cuts. Yet the timing and pace of eventual rate cuts are key, and the current outlook is darker and murkier than it was four months ago.