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Connecticut Economic Digest: July 1996 issue
Personnel Supply Industry: Leading Growth Indicator

Personnel Supply Industry: Leading Growth Indicator
by Charles Joo, Research Analyst

Personnel supply industry employment is known to lead the aggregate employment trends in the nation. The Federal Reserve Bank of Chicago published an article on the industry, supporting this theory with empirical data and analysis, (Lewis M. Segal and Daniel G. Sullivan, "The temporary labor force," Economic Perspectives, March/April 1995). In the report, the personnel supply industry, one of the fastest growing components of the services sector in the nation, was shown to be a leading indicator of aggregate economic growth as measured by total employment. An analysis of Connecticut's data is consistent with this theory.

Between 1992 and 1995, the services sector has added new jobs each year at a faster rate than total nonfarm employment. Like the nation, the personnel supply industry is one of the fastest growing sectors in the state, growing by 12.8 percent in 1995, when the state's employment grew by only 1.3 percent.

This growth in the personnel supply industry might also explain, in part, the continued loss of jobs in the manufacturing sector. Persons who are working for the manufacturing industry as "temporaries" are not counted in total manufacturing employment. Hence it is likely that the personnel supply industry is siphoning off some of the manufacturing workers into the services category.

The personnel supply industry (SIC 736) contains employment agencies (SIC 7361) and help supply services (SIC 7363) which provide temporary and continuing workers to client firms. Although the personnel supply industry currently makes up less than two percent of total employment in Connecticut, it accounted for over 43 percent of job growth between 1992 and 1995.

Employment agencies are defined by the Office of Management and Budget's Standard Industrial Classification (SIC) Manual (1987) as follows: Establishments primarily engaged in providing employment services, except theatrical employment agencies and motion picture casting bureaus. Establishments may assist either employers or those seeking employment. The manual defines help supply services as those establishments primarily engaged in supplying temporary or continuing help on a contract or fee basis. The help supplied is always on the payroll of the supplying establishments, but is under the direct or general supervision of the business to whom the help is furnished.

Peaks and troughs in the employment cycle in the personnel supply industry have led the total employment cycle during the latest recession and recovery.

A closer look at the data shows that the personnel supply industry's changes preceded changes in total employment by six to nine months. In other words, aggregate employment follows the personnel supply industry's direction by a few months. This supports the notion that during a recovery businesses sometimes utilize temporary workers until they are convinced that they can maintain additional workers on a permanent basis.

On the other hand, if firms start to cut back on hiring temporary workers, this is an early indicator that a recession (as reflected in the total employment) will soon follow.

An analysis of over-the-year percent changes in the seasonally adjusted data reveals that the personnel supply industry employment started to fall continuously in January 1989, six months prior to the total employment series' beginning to drop. Likewise, the personnel supply industry started to turn around in April 1992, nine months prior to the aggregate's trough in January 1993.

The over-the-year growth rate of the personnel supply industry has been much higher than that of total employment growth, averaging 10.2 percent, compared with 0.2 percent in the aggregate economy since 1992. Also evident, personnel supply industry job growth is much more volatile, falling more during economic contractions and rising more during expansions. However, the personnel supply industry's magnitude of change appears to correspond proportionately with total employment aggregate changes. In other words, the greater the decline in the personnel supply industry, the greater the decline in total employment which soon follows.

Current over-the-year monthly employment trends of the personnel supply industry suggest no recession in sight. However, weaker job growth calls for slower growth in the total jobs down the road. By tracking the movements of the personnel supply industry, we may be able to predict the next turning point in the state's employment cycle. Therefore, personnel supply industry employment trends could serve as a good leading economic indicator for policymakers and economists who need to base decisions on where the economy is headed.

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Last Updated: December 16, 2002