The canaries in the U.S. jobs market are showing signs of drooping.
Two key indicators—hiring for temporary-help positions and weekly working hours—have declined this year even as unemployment has remained near a half-century low.
The softening could be significant because, much like the proverbial canary in the coal mine, it often presages wider weakness in the jobs market. Companies worried about a downdraft in demand reduce hours and temporary staff first before laying off full-time workers.
That’s why economists are keeping an eye on these figures in Friday’s employment report even as the main payrolls number is expected to show steady hiring.
“The concern is that companies have already cut back on hours and the next shoe to drop is headcount,” said Diane Swonk, chief economist at Grant Thornton advisers.
A healthy labor market is critical to sustaining the record-long U.S. expansion because it provides households with much of their purchasing power. While that’s always important—personal consumption regularly accounts for more than two-thirds of gross domestic product—it’s particularly so now when uncertainty over trade is depressing corporate capital spending and exports.
It’s also key for the Federal Reserve. Chairman Jerome Powell has said the central bank is close to achieving its twin goals of maximum employment and price stability and is determined to keep it that way.
The Fed is widely expected to cut interest rates later this month after reducing borrowing costs in July for the first time in a decade in response to slowing global economic growth and muted inflation.
Employers probably added workers to their payrolls last month in line with the gain seen in July, according to the median prediction of economists polled by Bloomberg. Unemployment is projected to have held at 3.7%.
The headline number may get a temporary boost from government payrolls as hiring ramps up for next year’s decennial census, potentially adding about 40,000 to nonfarm payrolls.
There were mixed signs in data Thursday: the ADP Research Institute said U.S. companies added 195,000 jobs in August, the most in four months. A separate Labor Department report showed filings for unemployment benefits were little changed last week, near the lowest level since 1969. But the Institute for Supply Management’s August employment gauge for non-manufacturing industries was the weakest in more than two years.
Treasuries posted their biggest monthly gain since the 2008 financial crisis in August, after a rapid deterioration in U.S.-China trade relations and global growth fears ignited a global bond rally. Columbia Threadneedle’s Gene Tannuzzo is favoring shorter-dated Treasuries heading into Friday’s payrolls report.
“We think that ultimately, if the Fed is forced into action, we’ll see the front-end go down more than the market would expect,” said Tannuzzo, who manages the Columbia Strategic Income Fund.
Changes in temporary employment historically have preceded shifts in the overall jobs market by three to six months, said Cynthia Davidson, senior director of research for the American Staffing Association.
Temporary and contract staffing employment fell 4.4% in August from a strong performance a year earlier, after a 3.3% decline in July, according to the association’s regular survey of its members.
“The trade war is scaring people,” said Tom Gimbel, CEO of Chicago-based staffing company LaSalle Network. Companies still “need people but instead of needing 10 they need five and instead of needing them for three months they commit to six weeks,” he said.
ManpowerGroup Inc. has seen a “little softening in demand” for workers from manufacturing companies as trade tensions have turned them more cautious, said Becky Frankiewicz, North America president for the Milwaukee-based staffing company.
“Fortunately, we’re not seeing that across other sectors of the economy,” she said.
The slowdown in temporary help hiring that has occurred is not because of diminishing demand from employers but because of a shrinking supply of workers in a tight labor market, she said.
“We are seeing significant increases in permanent hiring,” Frankiewicz added, as companies offer new employees more flexibility in carrying out their jobs, including allowing them to work from home.
Hours worked across the economy remained steady for most of 2018 but began declining earlier this year. The manufacturing industry, which has fallen into a recession amid a worsening global outlook, slowing demand and an escalating U.S.-China trade war, already saw average weekly hours worked drop in July to the lowest level since November 2011.
The ISM’s manufacturing index signaled a contraction last month for the first time since 2016, as the employment gauge showed factory jobs declining. That suggests a pullback in August manufacturing payrolls.
Word of fewer hours has bubbled up in recent earnings calls. Titan International Inc., which makes wheels and tires for heavy vehicles, had been training a workforce to handle an increase in demand that has yet to materialize. “We are managing our labor costs through working hours and not by mass layoffs,” CEO Paul Reitz said Aug. 1.
Devin Stockfish, CEO of forest-products company Weyerhaeuser Co., noted on a July earnings call that some lumber mills had reduced hours to handle softer demand. By contrast, infrastructure builder Granite Construction Inc. increased hours worked significantly to handle a surge in business.
“We’re already seeing certainly a cutback in terms of investment in capital, and if companies are less willing to invest in labor then it starts to bleed into a weaker consumer backdrop as well,” said Michelle Meyer, head of U.S. economics at Bank of America Corp.
And that would be bad news for the economy.