Strong Labor Market in 2021 Faces Down Omicron Threat

The Labor Department report is scheduled to be released at 8:30 am ET Thursday.

Strong job creation has been a cornerstone of 2021’s robust economic growth and would be relied upon to underpin gains next year in the face of headwinds tied to the prolonged pandemic, elevated inflation and supply shortages.

Jobless claims, which can be volatile around holiday periods, will be closely watched in the coming weeks for any signs that the Omicron variant is causing employers to lay off workers. Claims data, which are reported weekly, are often an early signal that hiring, and the broader economy, is shifting.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, expects Omicron to curb growth less than the Delta wave did earlier in 2021, as long as the newest variant causes less severe disease, and thanks in part to new antiviral treatments.

Mr. Shepherdson expects employers to add 450,000 jobs a month, on average, in 2022. That would only be a modest slowdown from this year, when U.S. employers added an average of 555,000 a month, or 6.1 million jobs through the first 11 months of 2021, according to the Labor Department. This year’s job increase is already the largest on record back to 1940.

Mr. Shepherdson’s forecast is also well above the 168,000 jobs averaged monthly in 2019, before the pandemic took hold. He forecasts the unemployment rate to fall to 3.5%, matching the Federal Reserve’s projection for the end of next year. The unemployment rate was 4.2% in November.

Much of Omicron’s impact on the economy depends on whether the variant causes hospitals to be overwhelmed, he said. “In these circumstances, the widely held view in markets that successive Covid waves have a smaller impact on the economy, could easily be upended.”

However, some economists expect Omicron to prove more damaging than previous outbreaks. Oxford Economics, another forecasting firm, projects employment gains, which have eased from June and July, to slow further early next year.

“At the height of the Omicron transmission we could get very subdued employment that is close to stalling, led by a sharp slowing in net job gains in the service sectors such as leisure and hospitality,” said Kathy Bostjancic, chief U.S. economist at Oxford Economics. “This would reflect employers’ hesitancy in hiring and employees’ caution in working due to deteriorating health conditions.”

Jobless claims could rise in the coming weeks as the Omicron variant makes people nervous about leaving the house to work or shop, triggering layoffs and causing some workers to leave their jobs or delay their return to the workforce.

So far there are only signs of a modest economic impact due to the variant.  Airline flights have been grounded due to lack of crews, hockey and basketball games have been canceled, some businesses have temporarily closed or shifted back to remote work, and public schools have moved to online-only in early January. Some economists have downgraded forecasts for growth for early next year.

Another constraint on employment and economic growth next year could be the shrunken labor force, which has nearly 2.5 million fewer workers than before the pandemic. Job openings exceeded unemployed workers by 3.6 million in October, according to the latest available data from the Labor Department.

That has left employers clamoring for workers, raising pay and sweetening bonuses and benefits—and in some cases looking to different types of workers than they have in the past.

Tusco Display is short of the workers it needs to meet demand, said Chief Executive Michael Lauber. He has responded by seeking out part-time workers.

“We still would prefer to hire people on a full-time basis,” said Mr. Lauber. “But there’s a substantial number of people out there who for whatever reason—maybe it’s elder care, maybe it’s child care, maybe it’s who knows what—are not able or willing to take a full-time position.”

The Gnadenhutten, Ohio, company, which makes custom store displays, has stepped up recruitment of students, with nine high-school students joining Tusco doing light assembly work in the afternoons and evenings last week. The company also recently recruited a trio of young welding students from vocational programs. Mr. Lauber said he hopes to expand this team in 2022.

Labor supply constraints and the evolving pandemic, however, are unlikely to derail labor market improvements in 2022, said Bernard Baumohl, chief global economist of the Economic Outlook Group LLC.

“Our expectation is that the economy is going to continue to be strong,” he said. “And as a result, the demand for workers will also remain strong.”

Workers have gained leverage, he said, and that means they have become selective in the kinds of employment opportunities they find suitable. Self employment has also increased.

“They’re entrepreneurs and they’ve started their own business at a time when they thought they now have some financial resources to do so,” Mr. Baumohl said.

Phil Rice, of Roanoke, Texas, spent about 20 years in corporate finance, working for companies in the travel industry like American Airlines Group Inc. and Expedia Group Inc. Mr. Rice had been thinking about starting his own insurance business for a while, “then Covid kind of came along and really sort of solidified that,” he said.

Mr. Rice, 50 years old, left Expedia, an online travel-booking company, in late August and plans to open his business in February after he finishes needed training. He’s making the change to work more directly with consumers.

“I’m excited, because I get to make all the decisions,” Mr. Rice said. “But at the same time, I’m also anxious because I have to make all the decisions too.”

Write to Gwynn Guilford at [email protected]