I fit into this category and my anecdotal experience tells me that hiring managers favor contractors for that reason as well as the fact that the money to pay them sometimes is listed as a different line-item on the budget. I think the combination of the two helps as well - when looking at a large contractor line-item, knowing that it can be scaled back with less headache than a Full Time Employee (FTE) makes it easier to stomach I think.
If you're comfortable with hustling for work when the time comes, then contracting can be a much better arrangement. I work from home, basically whenever I want, and I make more money than I would as a FTE (even when factoring in the outrageous cost of health insurance these days).
The biggest thing I think is the mental shift. As a FTE, there's a stronger sense of job security. But really, layoffs happen all the time and as a FTE I feel like I'd be less prepared to find another job, whereas being a contractor means I have to constantly be thinking about the future.
Pick your poison I guess.