The January jobs report may reveal that the omicron variant led to the first significant decrease in payrolls in over a year.

• The January employment report, to be released Friday, may reveal the government's first monthly net loss of jobs in 13 months.
• While some economists anticipate a gain of 150,000 jobs, others predict losses as large as 400,000, according to a survey by Dow Jones.
• The loss of 301,000 private payrolls and the cautious comments from the White House and the Federal Reserve are contributing to Wall Street's expectation of negative numbers.

The first significant job loss since late 2020 could be revealed in January's employment report due to the sudden impact of the omicron Covid variant on the economy.

The payrolls report, which will be released on Friday at 8:30 a.m. ET, is expected to show a 150,000 gain, according to a poll of economists by Dow Jones. However, many other economists, including those from PNC, Jefferies, Morgan Stanley, Goldman Sachs, and Wilmington Trust, anticipate significant losses.

Diane Swonk, chief economist at Grant Thornton, stated that there is no doubt this is omicron, which is a pandemic, and it has consequences. She pointed out that the number of jobs lost could be particularly high because many workers do not receive paid sick leave, and if they call out sick, they are not considered working.

PNC predicts the highest number of job losses at 400,000. Other projections suggest a potential gain of up to 250,000 jobs. The last time the monthly employment report showed a negative trend was in December 2020, when it was down 306,000 and parts of the economy were still shut down.

The employment rate is expected to remain unchanged at 3.9%, with economists predicting a 0.5% increase in average hourly wages on a monthly basis, which amounts to a 5.2% yearly increase. This is in contrast to the 0.6% monthly increase seen in December, which translates to approximately a 4.7% annualized increase.

The ‘fog of omicron’

Swonk predicts a flat to negative number of jobs, with job losses potentially ranging from several hundred thousand.

"The fog of omicron is making it difficult to see through," she said. Swonk predicts a recovery in February and a bounce back in March. She noted that unemployment claims have decreased after a sudden increase in January.

Jefferies' money market economist, Tom Simons, anticipates a job loss of 200,000.

The market has already factored in the data, and there may be some initial volatility. However, after the payrolls are printed, the market returns to its previous state, indicating that the stakes are not high because everyone comprehends the unusual circumstances.

The Federal Reserve should confirm the swift negative reaction in the labor market to omicron, which is not a surprise, and it is likely to have no impact on Fed policy or interest rate hikes since omicron's effects are expected to be fleeting.

The Bureau of Labor Statistics has struggled to accurately report the pandemic's impact on the labor force. Initially, it underestimated job losses in 2020, and later failed to add them quickly enough.

Nearly 9 million people called out sick in early January during the height of the omicron spike, according to a survey taken in the week of Jan. 12, which the White House has already been warning could result in a weak payroll number.

Downward revisions to forecasts

The release of ADP's private sector data on Wednesday revealed a loss of 301,000 jobs in January, which was much higher than anticipated. This news caused some Wall Street economists to become more pessimistic.

Morgan Stanley economists lowered their job growth forecast to 215,000 jobs on Thursday, citing comments from Fed officials and the White House that suggested the data may be weaker than anticipated.

The labor market experienced a larger-than-expected impact from Omicron in January, resulting in a net payroll loss of 215k. However, strong household survey gains may help the Fed view this as a one-time occurrence.

Luke Tilley, chief economist at Wilmington Trust, believes that while the jobs data may be inaccurate in certain ways, he will closely monitor its impact on labor force participation, which is gradually increasing.

Watching hourly wages

The January reading of average hourly wages may not accurately reflect inflation due to the likely increase in the number of lower-paid, hourly jobs that were counted as lost. These jobs are expected to be in the leisure and hospitality sector.

The gain in hourly wages could be greater than the anticipated half-percent increase, as more of the gains were attributed to higher-paid workers.

Tilley believes that interpreting average hourly wages too literally can pose a significant risk, as it will impact various industries differently. However, he anticipates that payrolls will rebound in February as the omicron wave subsides.

"We believe that the losses reported will be mostly regained in February, and Omicron hospitalizations are decreasing rapidly," he stated.

Tilley anticipated a decline of 250,000 payrolls in January based on his analysis of high frequency payment processing data. However, he stated that the negative ADP report could indicate a lower number.