The omicron variant has almost surely created significant distortions in the American workforce that will become evident when the jobs report for January is released on Friday.
Investors, policymakers and firm managers should essentially write off the report as a one-time set of noise that will not alter the underlying strong trend in hiring and the tight labor market that will continue to drive top-line change in total employment through the remainder of the year.
We expect that total employment will have a net increase of 35,000 jobs and the unemployment rate will remain at 3.9%.
We expect that total employment will have a net increase of 35,000 jobs and the unemployment rate will remain at 3.9%. Essentially, the January jobs report will have a giant omicron asterisk next to it and will be discounted by central bank policymakers who are intent on pushing through to the next stage of normalization that will include rate hikes and a reduction in the Federal Reserve’s balance sheet in the first half of the year.
The key point in understanding the noise caused by omicron—as opposed to the signal organized around the underlying trend, which is closer to the three-month average of a 365,000 increase in hiring—is how the Bureau of Labor Statistics establishment survey will count those who called in sick during the sampling period. That period coincided with the peak of the omicron variant’s impact on the workforce.
If a worker calls in sick and is not paid sick leave, that worker is not counted as employed even if the worker is not laid off or fired. We expect significant distortions to the top-line count of total employment with significant risk of a negative print on the top-line employment report.
Anyone making more out of the top-line estimate than that will simply be confusing noise for signal, and that analysis should be taken with a large grain of salt.
Ironically enough, that noise will not affect the 0.5% month-over-month gain that we expect in average weekly hourly earnings nor the anticipated 5.2% year-over-year increase in those earnings. Both of those reflect the gains in the recent employment cost index for the fourth quarter and are in focus of policymakers intent on pushing through the next stage of normalization.
Despite the slowing of overall economic activity in January, job postings remain at an all-time high, and there is almost certainly less than one available unemployed worker for every opening. That ratio, in turn, has transferred extraordinary bargaining power to labor.
So where will the slowdown in hiring show up?
First and foremost, the slowing will be inside the leisure and hospitality sector as restaurants and hotels have pulled back on services available. I saw this during my monthly travels that took me to Houston, Dallas, Los Angeles and New York. It was difficult to obtain basic services and get a table at restaurants because there were simply not enough workers on the job to meet basic demand.
Second, transportation most likely suffered a large hit as evidenced by the shortages of supply and empty shelves at big box retailers and grocery stores from mid-December to mid-January. Workers calling in sick are now playing a part in another round of shipping and port backups that will contribute to a sharp slowdown in growth in the first quarter.
Finally, while manufacturing activity has held up, it is slowing and we would not be surprised to observe a weak print on job gains inside that sector and the entire goods-producing ecosystem and construction.
