Figure 1. Source: www.apollotechnical.com/why-companies-use-staffing-agencies/
This article is the first part of the 8-part series of Staffing Industry Analysis in the United States. It covers the influence of everpresent macroeconomic "forces" on the economy, and by extension, on the staffing industry ("SI," which will be used interchangeably with "staffing industry).
SI, being propulsive, has a major effect on the U.S. economy, and as a robust sector, plays an indispensable part in the American labor force contingent, and in the respective economy.
It's propulsive because many up-and-coming entrepreneurs are entering this industry on a daily basis, hoping to find the right product-market fit.
Has a major effect on the U.S. economy, because the U.S. labor market depends heavily on IS. To put things into perspective, every tenth employee in the U.S. was helped to find a job of his or her choosing, via a staffing firm.
Finally, robust, because it effectively sustains economic shocks, and is a recession-resilient sector, to say the least.
The aggregate Analysis of four parts will cover 1) Macroeconomic Trends, 2) Industry Overview, 3) Market Opportunities, and, finally, 4) Potential Prospective Mergers and Acquisitions (M&A).
This first part will probe into the aforementioned Macroeconomic Trends, its four main constituents being:
a) Introducing Economy Singularities/ Its Impact on SI
b) What Do Inflation, and Interest Rates Have in Common with SI
c) How Global Economic Trends Shape the SI Potential
d) Potential Economic Risks/ Opportunities in the Context of SI M&A
For the purposes of this article, a) and b) will be delved into and explained.
1) Macroeconomic Trends
Macroeconomic trendsare "neverending," and ever-present. We can choose to ignore them, and choose to avoid them but at our own "peril."
Modern macroeconomics is defined by business cycles, whereby market economies go through "ups" and throughs, expanding and contracting, being influenced by an almost unlimited number of factors. That is why economists seldom don't use the "ceteris paribus"/ "all else being equal," assumption when trying to explain economic phenomena, all the while choosing for a specific set of variables.
In this article, we'll analyze two such variables, inflation, and interest rates later, and GDP growth, unemployment rate, and regulatory environment, first.
Ok, let's begin.
a) Introducing Economy Singularities/ Its Impact on SI
As it's usually the case, GDP growth, unemployment rate, and regulatory environment are all closely linked and interconnected in today's integrated economy. Economy singularities might be singularities, but make no mistake, they are very seldom "an island," in and of itself.
Ok, now, let's see what they are, and how they relate to SI.
GDP Growth is a very present term in modern economics, and the mainstream "lingo," if you will. The U.S. economy has the most robust, as we mentioned, mechanism in the world, which prevents it from not "bouncing back" from a "painful" recession. The mechanism being, well-experienced and prudent central bankers, a flexible labor market, and highly and very integrated capital/ and financial markets, to name some. But what is GDP growth exactly? It replicates the economic activity of a respective country, whereby if there is an expansion in investments or consumer spending or a positive net export coupled with increased government spending, the gross domestic product, i.e. GDP goes "up." This necessarily means that the staffing industry will follow suit, to match the increasing demands of a more developed and growing economy, and this in effect lowers unemployment, which is a focus of our next topic.
The unemployment rate, something every politician would like to have control over, and something every economist tries to understand, is, of course, very closely linked to GDP growth, and SI has an interesting connection to it. When unemployment goes down, businesses struggle to match potential occupants' salary expectations, since the latter have vastly more options to choose from. In effect, companies resort to the staffing firms' possibility of filling up the needed vacancies. This is all, of course, heavily regulated, and an area of our next discussion.
The regulatory environment is ever-changing, hence businesses keep a "close eye" on the aforementioned. Immigration laws, labor market frameworks, and legislation in education and healthcare, to name a few, all affect the firms and companies in the economy. Immigration laws might increase the inflow of foreign workforce, thereby increasing the "business" for staffing firms. On the other hand labor market frameworks which can change, can exert additional "pressure" and costs on SI. Finally, legislation in, say, education and healthcare, all heavily influence the staffing industry, because of their effect on the respective sectors' work contingent.
Putting these three variables into perspective, the SI in the U.S., being of the most developed, and, yes, robust in the world, is heavily influenced by the constant American GDP growth, its very low and very stable, likewise flexible, unemployment rate, and finally a well developed, and predictable regulatory environment, safeguarded by its country's and economic institutions.
b) What Do Inflation, and Interest Rates Have in Common with SI
Inflation can be defined as the gradual and consistent upward trend in the general price level of the respective economy. Sometimes, this trend can "get out of control," and can lead to hyperinflation, which is abnormal growth of the aforementioned price levels in a market economy.
In the context of the U.S., the central bank, the Federal Reserve or the FED, plays a pivotal role in "safeguarding" stability inside the economy. It does so through a myriad of mechanisms but primarily by carefully adjusting the general interest rates.
So, interest rates are base-set by the FED (and by extension, the central banks of other respective countries), and commercial banks apply proportionally the aforementioned and adjust accordingly. Through adjust the interest rates, the FED and respective commercial banks influence the functions and activities of the American economy, and by extension the staffing industry.
Let's see how.
When it comes to inflation, there are multiple effects of the aforementioned on SI. Even the American flexible labor market is not immune to inflationary pressures. Hence, there are many variables affecting SI.
To keep things less complicated, and easy to go through, we'll focus only on three main aspects. These are: wage inflation, client pricing dynamics, and talent availability and turnover.
Wage inflation is effectively, a "upwards pull," if you will, to wages caused by inflation. This comes about from primarily two reasons. First of, as the general price level in the economy goes up, services and goods "go up," and workers necessarily demand higher wages and/or better conditions. In order to retain talent, and not compromise the company's business model, the aforementioned ones will increase wages, and in effect its "labor costs." Since companies, as mentioned every 10th employee, is dependable on staffing companies, staffing companies, by extension, face higher operative costs, too.
When it comes to client pricing dynamics, many staffing companies' contracts will include "clauses," whereby, wages will be inflation-adjusted, and drive the company's cost "upwards," in the present, or even near future, depending on macroeconomic "calamities," which are seldom predictable. This, likewise, requires a careful approach by the staffing companies when negotiating with their clients, as well as when attracting the talent pool. A delicate balance is needed between matching current and prospective costs and retaining talent.
This leads us to talent availability and turnover. In the high-inflation environment, if wages don't go "up," and if the SI firms don't exert effort to secure attractive conditions including clauses which, well, protect current and future employees, the talent "pool" will be much smaller, and the respective turnover will be larger.
But, when speaking about inflation, one cannot ignore interest rates.
Interest rates affect almost everything in a modern market economy. The U.S. economy, having the largest capital market in the world, so, likewise, a financial market, is constantly keeping a "tab" on interest rates, especially the high demand-driven staffing industry. We will touch upon three main areas affected by changing interest rates: business investment and expansion, consumer spending, and economic growth and employment levels.
When interest rates are lowered, in an inflation-low environment, business investment and expansion are stimulated. Credit interest rates go down, making it cheap and affordable for businesses to finance their entrepreneurial endeavors. Whether they be operative/ working capital investments or long-term tangible asset building, it all generates increased growth of respective companies. By extension, staffing firms expand to new markets, acquire new clients, and broaden their staffing base, if you will.
The other side of the "coin," is consumer spending. Lower IR makes taking of consumer loans, car loans, or even mortgage ones, very attractive. This means high aggregate demand, more growth, more vacancies open, and more business for staffing firms. Anticipating and adapting to changing consumer spending is crucial for SI.
Finally, economic growth and employment levels follow the low IR environments, hence the former stimulates the latter and leads to increasing revenues for staffing firms' core business: matching the large demand with their staffing talent supply.
Conclusion
"Wrapping up," these were the first factors shaping and being shaped by the U.S. Staffing Industry. In the texts to come, more of them will be analyzed, extending to not only macroeconomic, but business, market, and M&A ones as well.
Likewise, Redmount M&A has an extensive track record across many industries in mid-market space, advising on strategy, medium to long term, but not excluding short-term needs, when it comes to executing transactions, achieving strategic capital restructuring, matching the desired market expansion objectives, and business owners wanting to sell their business.