Summary

• Rapid decline in temporary workers indicating potential job losses.
• Temp employment is an indicator of future job market shifts.
• Increase in temp job cutbacks indicating cost-cutting by companies.

Employers have been rapidly shedding temporary workers at a fast rate, which could be a sign that broader job losses could be on the horizon. According to recent data, in the last five months of 2022, employers cut 110,800 temp workers, including 35,000 in December alone, which is the largest monthly drop since early 2021.

Many economists view the temp sector as an early indicator of future labor-market shifts, as temporary employment typically declines before some recent recessions and during economic slowdowns. Temporary workers, who are typically employed through staffing agencies, are easy for companies to bring on board and let go.

"For me, it's a real warning sign," said James Knightley, chief international economist at ING. "The jobs market may not be invulnerable to the downturn story. Cutbacks in temporary jobs add to other evidence that companies are adopting more of a cost-cutting stance, Mr. Knightley said. Corporate job-cut announcements are up significantly from a year earlier and business executives are somber about the outlook, he added.

The labor market is historically strong but slowing. Employers added 223,000 jobs in December, which is the smallest gain in two years. Economists surveyed by The Wall Street Journal expect higher interest rates to trigger job losses and a recession this year as the Federal Reserve's interest-rate increases filter through the economy.

Pullbacks in temp employment preceded broader payroll declines by several months in recent downturns, including the 2001 and 2007-09 recessions. For instance, employment in the temp sector began falling in early 2007, while employment across all sectors started to descend about a year later. However, it's worth noting that trends in the temp sector are volatile and don't necessarily signal a recession is imminent. Temp jobs fell four months in a row in 1995, for instance, during a period of economic growth.

Tom Gimbel, chief executive at staffing firm LaSalle Network, said the easing of temporary employment demand is concentrated among some large companies seeking to trim costs. Those firms are cutting temporary workers hired for special projects, such as beta testing at a tech company, he said. But many smaller businesses are still looking to scoop up temporary workers, Mr. Gimbel said. Demand remains high for many types of temp help, including in software development, healthcare, and manufacturing, he said.

"The small- to medium-sized companies are still bringing on people, because they were losing in the war for talent against big companies that had an endless supply of money and budgets to hire people," he said. The broader decline in temp employment coincides with other indications of a labor-market slowdown. Hiring is cooling. Workers are taking longer to find jobs and staying on unemployment benefits longer. And workers' average weekly hours are back at prepandemic levels. Manufacturers' overtime hours slipped in December to the lowest level since the pandemic lockdowns and the aftermath of the 2007-09 recession.

Usually, companies adjust their payrolls after they experience a decline in demand, said Gad Levanon, chief economist at the Burning Glass Institute. Weaker demand is emerging in industries related to the manufacturing, transportation, and selling of goods. Consumer spending on services, though, is still running strong as sectors including leisure and hospitality continue to recover from the pandemic, he said.

"What we probably will have in the economy in the coming months is continued growth in consumer services and a decline in the rest of the economy," he said. Mr. Levanon expects the economy as a whole will contract by the middle of this year. Some of the declines in temporary employment could reflect a normalization after aggressive hiring throughout much of 2021 and into 2022.