Staffing Trends

Timothy McHugh, CFA Christopher York 312.364.8229 312.364.8341 [email protected] [email protected]

Please consult the last page of this report for all disclosures.

Equity Research

Employment Sector

Signs That Labor Market Improvement Might Be Accelerating a Bit Overview: The Department of Labor announced this morning that the U.S. labor market added 216,000 jobs in March, which was better than the consensus projections for a gain of about 195,000 jobs. The unemployment rate also ticked down slightly. These results are consistent with a number of other data points that suggest a continued improvement in the labor market, including perhaps a slight acceleration in that pace of that improvement during the last two months. The underlying trends within the labor market also appear favorable for the staffing and consulting companies that we cover. Contrary to some concerns that temporary staffing employment would tick down sequentially during March and was leveling off because of a preference by corporations for full-time workers at this point in the cycle, temporary staffing employment continued to improve during March, with the year-over-year growth rate remaining relatively strong at 12.5% despite tougher year-ago comparisons. We also note that employment in several parts of the business services sector is increasingly strong. Employment in the consulting field is improving, employment in the accounting field jumped in March by the biggest amount since 2003, employment growth in the IT sector appears to remain quite strong, and employment in clerical and administrative positions continues to grow quickly. We view this as a positive sign for staffing firms focused on professional and clerical fields, as well as for consulting firms. We remain bullish on many of our employment-related stocks, but we have become slightly more selective in picking stocks within the group (6-12 months ago we recommended nearly every employment-related stock that we cover, but we now recommend about 60% of them). Revenue multiples are below the levels the group enjoyed in the mid-2000s and revenue growth rates are improving, so we believe the overall group will perform well during the next few years. At this point in the cycle, though, we are focusing our recommendations on those companies that can drive strong peak-to-peak earnings through secular growth in the industry, market share gains, an increase in their addressable market, or structurally improved profit margins. Our Outperform-rated small-cap stocks in this group right now are CTPartners (CTP $14.15), Korn/Ferry (KFY $22.27), and Dice Holdings (DHX $15.11), while our Outperform rates midcap names are Robert Half (RHI $30.60), Manpower (MAN $62.88), and Paychex (PAYX $31.39).

Business Services: Global Services │Staffing April 01, 2011

William Blair & Company, L.L.C.

Timothy McHugh, CFA 312.364.8229 2

Highlights From the Department of Labor Report: The Department of Labor announced this morning that the U.S. labor market added 216,000 jobs in March. This result exceeded the consensus estimate by 21,000. The report also included small positive revisions for the last two months. Government employment continued to decline for the fifth consecutive month. If we exclude government workers and temporary staffing in the month of March, the United States reported an increase of about 201,000 jobs. This represents the second consecutive month of 200,000 job additions, which is roughly double the average monthly gain during the preceding seven to eight months.

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Monthly Change in Private Sector Nonfarm Payroll, Excluding Temporary Staffing (in thousands)

Another positive data point in this report was a continued gradual decrease in the unemployment rate, which has now decreased for four consecutive months. The unemployment rate slightly decreased 10 basis points to 8.8% during March, which was lower than the consensus estimate for an unchanged rate of 8.9%. The unemployment rate is now at its lowest point since March 2009. The Fed is projecting the unemployment to range from 7.5% to 8% at the end of 2012.

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Turning to industry-specific employment, the report showed job growth across professional and business services, healthcare, leisure and hospitality, mining, and manufacturing sectors. As shown below, job growth in professional and technical services, which is a proxy in demand for many of the professional services companies that we cover, was relatively strong (up 35,000).

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Department of Labor ReportEmployment in Professional and Technical Services(i.e., Accounting, IT, Legal, Engineering, Consulting)

As shown in the chart below, job growth within the business and professional services sector continues to be strongest in the administrative support and IT sectors, which is consistent with commentary we hear from many staffing companies. However, we also note that there was a relatively strong recovery in accounting employment during the month of March. Accounting employment increased 1% year-over-year to 898,000 jobs, which represents the first year-over-year growth since August 2008. On a sequential basis relative to February, employment in the accounting field increased 20,200, which is the largest sequential improvement since February 2003. Employment in the management consulting industry also continued to improve in March. Lastly, employment in the legal sector remains muted.

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Business and Professional ServicesYear‐over‐year Change in Employment

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Employment in the temp staffing industry continued to recover during the month of March. There had been some short-term concerns that temporary staffing employment would decline on a sequential basis, based on a slowing trend within the American Staffing Association’s weekly staffing index. Growth within the sector remained strong, however. Based on the seasonally adjusted data, year-over-year growth in temporary-staffing employment was 12.5%, relatively unchanged from growth of 12.8% and 12.9% during the previous two quarters. The non–seasonally adjusted data actually grew slightly faster on both a sequential and year-over-year basis. As shown in the chart below, the year-over-year growth rate for the sector has been decelerating because of difficult year-ago comparisons, but has leveled off somewhat during the last few months at a still healthy growth rate—the peak growth rate for the sector last cycle was about 8%. Temporary staffing now accounts for 1.73% of the total labor market (penetration rate), up from 1.55% during the year-ago period. Employment in the temp staffing sector has now replaced more than half of the 931,000 jobs that it lost from its peak and is about 15% below its prior peak employment level.

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Year-over-year Change in U.S. Temporary Help Employment

Other Recent Labor Market Data. The bullet points below highlight other labor market data that was released during the last week.

Initial Unemployment Insurance Claims. Initial unemployment claims were flat during the

month of March compared with the month of February, yet March claims trended down throughout the month. Initial unemployment insurance claims for the week ended March 26, 2011, were 388,000. This was the lowest number of initial unemployment insurance claims during the month of March. The four-week moving average of initial unemployment insurance claims is now at 394,000, which is below its 10-year moving average of 397,000. This compares with a four-week moving average of 428,000 at the beginning of December, 413,500 at the beginning of January, 418,250 at the beginning of February, and 396,000 at the beginning of March. The 400,000 level is a closely watched level that many people have historically associated with the difference between an improving and weakening labor market, so a sustained movement below that level is an encouraging sign.



Source: U.S. Department of Labor

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Four-week Moving Average of Weekly Initial Unemployment Claims(claims in thousands)

Challenger, Gray, & Christmas Job Cut Report. The Challenger, Gray, & Christmas job cut report showed total planned job cuts of 41,528 in March, down 39% year-over-year. Employers announced a total of 130,749 job cuts in first quarter 2011, which is 28% lower than the 181,183 planned layoffs announced in the prior-year quarter. As reflected in the chart below, the total number of job cuts has moderated over the last year, remaining close to an average level of 42,000 planned cuts a month. Consistent with previous months’ results, the government/nonprofit sector was the most active in terms of announced job cuts in March. During the month of March, planned job cuts in the public /nonprofit sector represented 46% of layoffs.

Source: Challenger, Gray, & Christmas Job Cuts Report

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Challenger, Gray, & Christmas Job Cuts ReportAnnounced Planned Job Cuts

American Staffing Association Index. As reflected in the chart on the following page, the American Staffing Association Index (ASA) has trended up slowly during the first quarter. In the most recent week (ending March 20), the ASA index was 91, flat with the previous week, representing an 8% year-over-year increase from the prior-year week. The average year-over-year increase for the ASA thus far in March is slightly more than 8%, versus 12% in February, 13% in January, and 24% in December. We attribute most the of deceleration in the year-over-year growth rate in this index to tougher comparisons for industrial staffing firms, which account for the bulk of the index. We believe that the growth rate for most professional staffing firms is still



accelerating or has leveled off at high levels. Overall, we believe that the weekly ASA trends suggest that the demand environment remains solid for temporary staffing services.

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ADP Employment Report. The March 2011 ADP employment report reflected total private sector

job gains of 201,000, which was slightly below the consensus estimate for job gains of 205,000. This marks the 14th consecutive month of job gains. Overall, ADP’s data shows a meaningful improvement in job growth over the last four months. Job gains over the last four months have averaged 211,000 during the previous four months, versus an average addition of about 65,000 during the prior nine months.

Source: ADP

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Looking at employment by sector, March’s job growth was once again predominately in the service-providing sector. During the month of March, private-sector employment in the service-producing sector increased by 164,000. Meanwhile, private-sector employment in the goods-providing sector continued its trend of a slow recovery as it increased for the fifth consecutive month during March (up 37,000).



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ADP Employment ReportMonthly Private Employment Trends By Sector

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Monster Employment Index. During the month of March, the Monster Employment Index (MEI)

increased 9% year-over-year. This growth rate has moderated somewhat during the last six to nine months, but the growth rate bounced back up in March despite a tough comparison. Some of the slowdown during the last few months is attributable to reductions in public administration employment, which declined 13% during March, and weaker hiring in the real estate sector. Turning to industry-specific trends within the MEI, mining, quarrying, oil, and gas extraction lead the way with 68% growth from a year ago, followed by utilities with 35% growth.

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Conference Board Online Help Wanted Index. Painting a somewhat different picture than the Monster Employment Index, the Conference Board’s Online Help Wanted Index showed a year-over-year growth rate of about 19% for the month of March. The index now stands at the highest level since May 2007. New ads, which are unduplicated ads not appearing during the previous month, were up 22% year-over-year and 4% sequentially. The year-over-year trend had been



moderating since peak levels in mid-2010 because of a tougher year-ago comparison, but has bounced back up modestly during the last month or two.

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Institute of Supply Management (ISM) Employment Index. As shown in the chart below, trends

in the ISM manufacturing index remained elevated during the month of March (the ISM nonmanufacturing index will be released on Tuesday, April 5). The ISM manufacturing employment index cooled a bit during the month of March to 63 from February’s 64.5 reading. While the index slowed a bit from February, the index still remains very high, as March’s reading represents just the fourth month in the past decade that this part of the index has been above 60. On a year-over-year basis, the index grew 14%. As a reminder, a reading above 50 implies that the manufacturing or nonmanufacturing economy is expanding.

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Additional information is available upon request. Current Rating Distribution (as of 03/31/11) Coverage Universe Percent Inv. Banking Relationships* Percent Outperform (Buy) 58 Outperform (Buy) 9 Market Perform (Hold) 31 Market Perform (Hold) 2 Underperform (Sell) 1 Underperform (Sell) 0 *Percentage of companies in each rating category that are investment banking clients, defined as companies for which William Blair has received compensation for investment banking services within the past 12 months. Timothy McHugh attests that 1) all of the views expressed in this research report accurately reflect his/her personal views about any and all of the securities and companies covered by this report, and 2) no part of his/her compensation was, is, or will be related, directly or indirectly, to the specific recommendations or views expressed by him/her in this report. We seek to update our research as appropriate, but various regulations may prohibit us from doing so. Other than certain periodical industry reports, the majority of reports are published at irregular intervals as deemed appropriate by the analyst. Stock Rating: William Blair & Company, L.L.C. uses a three-point system to rate stocks. Individual ratings reflect the expected performance of the stock relative to the broader market over the next 12 months. The assessment of expected performance is a function of near-term company fundamentals, industry outlook, confidence in earnings estimates, valuation, and other factors. Outperform (O) – stock expected to outperform the broader market over the next 12 months; Market Perform (M) – stock expected to perform approximately in line with the broader market over the next 12 months; Underperform (U) – stock expected to underperform the broader market over the next 12 months; Not Rated (NR) – the stock is currently not rated. Company Profile: The William Blair research philosophy is focused on quality growth companies. Growth companies by their nature tend to be more volatile than the overall stock market. Company profile is a fundamental assessment, over a longer-term horizon, of the business risk of the company relative to the broader William Blair universe. Factors assessed include: 1) durability and strength of franchise (management strength and track record, market leadership, distinctive capabilities); 2) financial profile (earnings growth rate/consistency, cash flow generation, return on investment, balance sheet, accounting); 3) other factors such as sector or industry conditions, economic environment, confidence in long-term growth prospects, etc. Established Growth (E) – Fundamental risk is lower relative to the broader William Blair universe; Core Growth (C) – Fundamental risk is approximately in line with the broader William Blair universe; Aggressive Growth (A) – Fundamental risk is higher relative to the broader William Blair universe. The ratings and company profile assessments reflect the opinion of the individual analyst and are subject to change at any time. The compensation of the research analyst is based on a variety of factors, including performance of his or her stock recommendations; contributions to all of the firm’s departments, including asset management, corporate finance, institutional sales, and retail brokerage; firm profitability; and competitive factors. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies—to our clients and our trading desks—that are contrary to opinions expressed in this research. Our asset management and trading desks may make investment decisions that are inconsistent with recommendations or views expressed in this report. We will from time to time have long or short positions in, act as principal in, and buy or sell the securities referred to in this report. 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Staffing Trends