Business services firms face great risks in the near term as the economy shows worrying signs. Consumer confidence in April reached its lowest level since July 2022. U.S growth slowed to 1.1% in the first quarter of the year. High interest rates continue to decrease capital spending throughout the country. All factors point toward an economy that may struggle in the near term.
Certain sectors will bear the brunt more than others. If the past is any indication of the future, expect the staffing space to slow significantly. Interest rates soared to over 6% during the Great Recession that spanned 2007 to 2009. As we currently hover around 7% and face some of the same employment challenges that we did during that period, the Great Recession could be a template for what to expect in the near term.
Source: Bloomberg
Public staffing firms saw an 85% decrease in earnings per share (EPS) during the Great Recession. Since the start of the pandemic, those firms have experienced a 7% decrease in EPS. Both are significantly lower than any other subsector in the business services space. Expect that percentage to worsen if we continue to experience economic shocks, such as the recent banking failures.
We expect to see similar negative effects on middle market staffing firms. Traditional staffing firms may transform and pivot to new service offerings to remain relevant and stay afloat. For example, in previous times of stress, traditional staffing firms offered payroll processing services, workforce management, outsourced human resource functions and other workforce consulting services.
Preparation is key
Staffing firms may want to brace for a decrease in demand as high interest rates continue and if layoffs increase. All signs point to these firms enduring a similar experience as the Great Recession. For more established firms looking to grow through mergers and acquisitions, this could create an opportunity, because some staffing firms won’t have the tools and resources to maintain their independence. For firms looking to remain agile and resilient, ensuring they have the proper resources and processes in place not only helps weather the pending storm, but could also help their organization identify additional opportunities for growth.
