by Randall Mehl

Three down and one to go. Amid all the grim news, the human-capital services sector actually began to show some life.

In September 2001, we wrote an industry report titled “Human Capital Services - Looking Forward to 2002.” We should have been more careful about what we wished for. With three-quarters of the year behind us, business conditions remain difficult and, more importantly to us, stocks are even lower than where they finished at the end of a miserable 2001. Were it not for the successful Hewitt IPO and the launch of HRO Today, the Human Capital Services (HCS) sector may have been heading for a good old-fashioned shut-out. Then came Q3 reporting season. Amid project deferrals, declining payrolls, a capital spending freeze, and lower float yields, the HCS sector actually began to show some life.

Our HCS universe experienced no negative profit warnings in the quarter (it’s amazing what extremely low expectations can do). In the employment-related areas of HCS, the best leading indicator is temporary staffing, particularly commercial staffing. Manpower, the world’s second-largest staffing company, saw positive revenue growth for only the second time in the past two-and-a-half years—the stock was up 18% on the announcement. The staffing group as a whole actually grew from Q2 by approximately 3.4% (see chart).

While the payroll segment continued to struggle along, Ceridian’s HRS division registered profit growth for the first time in two years.

Hewitt and Watson Wyatt both posted surprisingly positive results - their consultingusinesses are benefiting from corporate America’s problems du jour - underfunded pension plans and rising healthcare costs.

The biggest challenges came in the areas most dependent on full-time employment services. As one involved in the analyst-recruiting process at Baird, I experienced the effects first hand when I failed to find a candidate less qualified than myself. Heidrick and Struggles, the world’s leader in executive search, saw revenue decline 7% from an already-low Q2 level, and expects an even softer outlook. TMP, which owns Monster as well as a host of other employment-related businesses, put up reasonable Q3 results, but offered a dire short - term outlook.

Finally, while we were all either reporting Q3 results or trying to make sense of them, Paychex CEO Tom Golisano was running for Governor of New York as an Independent. Although his candidacy did little for the stock, Golisano managed to accumulate a respectable 14% of the vote, while delivering several strong messages to the parties. His campaign reportedly cost over $70 million—well worth it to keep the system honest, in our view. In neighboring New Jersey, Democrat Frank Lautenberg, a cofounder and former CEO of ADP, replaced Senator Robert Torricelli on the ballot with just 36 days to the election and will once again represent the Garden State in his fourth term .