(Updates to include July jobs data.)
As orders for locomotive engines picked up this spring, the GE Transportation factory near Erie, Pa., started hiring to fill positions, which had fallen to 4,000 from 5,500 last year. At 18-employee Pilla Performance Eyewear in Ridgefield, Conn., business ramped up enough that it expanded its staff by eight. And at medical device maker Theragenics (TGX), based in Buford, Ga., an unexpected spike in first-quarter orders led the company to add a few dozen workers to its roughly 500-person head count. Finally, U.S. companies are staffing up.
The problem is, many of the positions have been filled with temporary workers. That's common in the early stages of an economic recovery; companies, uncertain whether increased demand will last, add workers who are more easily hired and fired. This time, though, the growth in temporary positions hasn't been followed by significant hiring for permanent jobs six months later or so, the typical pattern in the U.S. "Temporary workers are just substituting permanent hires, not preceding them, because companies still don't trust the strength or viability of the recovery," says Harm Bandholz, chief U.S. economist at UniCredit in New York. "Recovery is much more fragile when it's based on temporary jobs instead of permanent jobs."
Hiring of temp workers had been rising each month since October 2009, until they dipped in July by 5,600, according to the Bureau of Labor Statistics. From October to January, employees at staffing agencies like Manpower (MAN) and Robert Half International (RHI) grew at the fastest pace on record—an annualized rate of 51.5 percent, says Bandholz. Private payroll expansion, meanwhile, averaged about 100,000 a month during 2010's first half, "a pace insufficient to reduce the unemployment rate materially," Federal Reserve Chairman Ben Bernanke told lawmakers in July.
Given the depth of the recession and concerns about a double-dip, companies are seeking more proof of customer demand before doing much permanent hiring. In a robust economy, the acceleration in orders at GE Transportation could have led to hiring full-time workers, says Stephan Koller, the company's spokesman. Proof of sustained demand hasn't yet appeared. "The economic recovery has been volatile, and continues to be volatile," says Koller. "If and when that changes, we will respond on the workforce front. You can't bring someone on staff full-time if you don't know that the demand will be there."
Frank Tarallo, chief financial officer of Theragenics, a $40 million company that makes products for the surgical and prostate cancer treatment markets, says that for heavily regulated industries like his, questions about health-care reform and other legislation are layered on to concerns about the economy. "Until there's more certainty about the rules of the game, it's very difficult to plan," he says. "A few years ago we used a few temps, and today we have a significant number. We see a fickleness in the macro economy creating an awful lot of uncertainty for our customers, and it's very difficult to predict their behavior. It makes us very discerning when it comes to adding to full-time head count."
The rise in temp workers could be part of the "new normal" that the recession has produced. Once the economy recovers, American companies may start mimicking European counterparts and use a larger percentage of temporary workers permanently, says Jonas Prising, president for the Americas at Manpower. The recession may have taught them the benefit of being able to quickly hire and fire people to more closely match demand, he adds.
"The economy shifts quicker now," says Daniel Herrick, chief operating officer of Pilla Performance Eyewear, which makes sunglass lenses and frames for athletes. "You need the flexibility in your manpower costs, since sales can fluctuate more." Another aspect of the change, says Theragenics' Tarallo, "is that everyone expects to live in the gray zone much more than they used to have to. It will be a normal part of life for us to have these uncertainties as part of our strategic planning process."
It's likely to be a long slog to lower unemployment. The jobless rate won't budge from 9.6 percent this year, according to a Bloomberg survey of economists. While growth in gross domestic product of about 3 percent is widely expected for 2010, Oppenheimer Funds corporate economist Brian Levitt says it would take at least 4 percent to make a dent in the unemployment rate.
The bottom line: More temp jobs once meant more permanent hiring a few months later. With business worried about the recovery, that's not happening.