Last week brought more bad news for the economy, as it appears that the debt ceiling drama has caused a hiccup in hiring.
Employers added only 148,000 jobs in September, down from 200,000 in August and short of analysts' expectations of 185,000. Following the report, the headlines seemed to paint a fairly scary picture of the state of employment in the U.S.
Still, even in the wake of some scary jobs numbers, you shouldn't sell your staffing stocks.
Here's why you should keep your staffing stocks
So why should you hold on to your staffing stocks, even in the wake of a poor jobs report? First, let me point out that temporary staffing companies don't need a low unemployment rate to turn a profit. This is obvious to some -- especially those who have held staffing-industry stocks for years -- but is lost on most.
Don't take my word for it; just look at how some of the biggest staffing companies in the world have performed in recent years. Robert Half International (NYSE:RHI) and Manpower (NYSE:MAN) have both surprised, if not shocked, experts in recent years. Robert Half's recent third-quarter earnings report saw net income rise 16% year over year; Manpower's quarter was even more of a blowout, as earnings grew 50%.
The reason temporary hiring typically does well in all markets, even amid higher unemployment, is pretty simple. Business owners turn to temps not only when they are understaffed, but when they are uncertain. If a business isn't doing so well, hiring managers will often turn to temps so they can downsize easily if need be.
That simple fact has been largely lost on Wall Street since the recession hit. While these firms are earning more now than they did from 2008 to 2010, they were both largely profitable during those times as well. Temp firms that offer manufacturing services, like Manpower and Kelly Services (NASDAQ:KELYA), typically hold a greater perceived connection to the unemployment rate and are undervalued in tough economic times. Perhaps that's why Kelly and Manpower have both beaten analyst expectations every single quarter for three straight years!
Getting back to the jobs report and why you shouldn't let it scare you into selling, it's important to point out that analysts typically miss on their monthly estimates. It's hard to predict employment numbers from month to month. However, the jobless rate has been steady, within a 1% range, for more than a year now, and hiring has consistently ticked upward.
Here's a look at the unemployment rate over the past year:
So long as new hires and unemployment rates remain stable, temporary staffing will do well. Even if unemployment is high, temporary staffing will continue to thrive. Stability is the key -- and after a single bad jobs report, I'm not ready to say that stability is in doubt.
What could change the outlook for staffing stocks
The reason stability matters more to staffing firms than to the overall job market their need to manage overhead. If unemployment stayed above 7% but did not exceed 8.5% for the next three years, it's highly likely that Robert Half, Kelly, and Manpower would continue to grow earnings.
While these companies have largely beaten analyst expectations since 2009, that was only once the jobless rate stabilized. When the jobless rate is in free fall and companies are too uncertain to hire at all (temps included), staffing companies can't shed their overhead fast enough to adapt.
I don't think we're anywhere near such a scenario for two reasons.
For one, the "quits" rate, or the percentage of workers voluntarily leaving their job, is ticking up. This is good for all employment providers, especially temp agencies, which often fill sudden employment vacancies. It's also a sign that the job market is stable and possibly improving, because employees feel confident enough to leave their jobs.
Secondly, staffing margins have been outpacing revenues. When staffing companies get desperate, they start taking on lower-margin, riskier, clients. Analysts often herald these increased revenues, but they're a bad sign. That's why, in my opinion, Kelly's flat second-quarter revenue is a good thing. Kelly turned down bad clients and increased higher-margin (Kelly OCG) consulting work, which is a sign of strength.
By keeping an eye on the "quits" rate and staffing firms' margins, you can sometimes tell when earnings are due to head south. All of these figures matter far more than the number of jobs added from month to month.
Think differently about employment
Employment is one of those unique areas where the headlines are never so obvious as they seem. That's why I'd encourage you to take every employment statistic, remove the headline, and think about how the figures actually impact businesses.
If employment heads in a downward spiral, none of these nuances will matter. However, it's far more likely that we'll just remain stagnant, so take reports and headlines with a grain of salt.
We should try to think about employment differently and look beyond the surface. If we do, we may be surprised at what we find.
Adem Tahiri has no position in any stocks mentioned. The Motley Fool recommends Robert Half International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.