'Hiring is being held back': Economy added just 199K jobs in December as worker shortages persisted and omicron began spreading in U.S.

Hiring slowed sharply for a second straight month in December, with employers adding just 199,000 jobs, as the omicron variant began driving COVID-19 cases higher.

The unemployment rate, which is calculated from a different survey, fell to 3.9% from 4.2% the prior month, the Labor Department said Friday. That's just above the 50-year low of 3.5% reached in February 2020, before the pandemic shook the U.S. economy. 

Economists surveyed by Bloomberg had estimated that 444,000 jobs were added last month.

A modest consolation: Job gains for October and November were revised up by a total 141,000, though November's sluggish 210,000 was nudged up by just 39,000.

For all of 2021, the economy added a record 6.4 million jobs, or 537,000 a month, as the nation continued to recover from the unprecedented losses caused by the pandemic-induced recession and shutdowns of 2020. So far, the U.S. has recouped 18.8 million, or 84%, of the 22.4 million jobs lost early in the pandemic, leaving it 3.6 million jobs shy of its pre-crisis level.

Worker shortages persist

Some economists said December's disappointing job creation may have reflected persistent worker shortages as COVID fears and child care duties continue to keep many workers on the sidelines.

"It is clear that hiring is being held back by labor supply constraints," Richard Moody, chief economist of Regions Financial, wrote in a note to clients.

In an interview, Labor Secretary Marty Walsh said the overall advances in 2021 show the job market is "heading in a positive direction." But, he added, "The issue is people are still not coming back into the work force...We need to get more people entering the labor market."

On the bright side, the labor crunch is driving up workers' pay, with average hourly wages up 4.7% annually in December.

Generally, economists expect another year of sturdy job gains in 2022 that drive payrolls above their pre-pandemic level, but the omicron surge could delay that recovery in the short term. The highly infectious variant propelled daily COVID cases above 1 million this week, shattering previous records, but most analysts reckoned it occurred too late in the month to dampen the government’s December survey, which is conducted the week that includes the 12th.

Meanwhile, job growth had appeared set for a healthy rebound from disappointing November gains as widespread worker shortages eased slightly. The expiration of enhanced unemployment insurance in early September failed to immediately lift employment gains, but Goldman Sachs expected a bounce last month as many of the 4.6 million workers who lost benefits resumed their job searches.

Also, employers are hesitant to let workers go because of the labor shortages. Initial jobless claims, a gauge of layoffs, have tumbled even below their pre-COVID mark in recent weeks.

And unseasonably warm weather in early December should have juiced job increases in industries such as construction, Goldman estimated.

How much did restaurants, retailers hire?

Construction did add a solid 22,000 jobs but other industries turned in tepid showings. Leisure and hospitality, which includes restaurants and bars and was hit hardest by the pandemic, led the job gains with 53,000 but that's well below its average advances in the recovery. The sector is still down 1.2 million jobs compared with its pre-pandemic level. Professional and business services added 43,000; manufacturing, 26,000; construction, 22,000; and transportation and warehousing, 19,000.

Retail lost 2,100 jobs and federal, state and local governments shed 12,000.

Those numbers and the modest 199,000 overall job gains come from a survey of business establishments. The unemployment rate is determined by a smaller survey of U.S. households.

Uncertainty over omicron

For a second month, the household poll was significantly more encouraging, revealing substantial job gains that drove the jobless rate lower. The survey of business establishments is more extensive and generally deemed more accurate but isn't always the best barometer, especially since it has suffered from low response rates during the health crisis. 

The December report may have partly captured employers' uncertainty about hiring as omicron took hold. The variant is expected to significantly slow job gains early in the year as workers again pause job hunts and shoppers curtail spending on dining out and other activities, says economist Lydia Boussour of Oxford Economics.

“As we enter 2022, near-term labor market prospects are dimming amid a tidal wave of Omicron cases,” Boussour writes in a note to clients.

Vaccination mandates by private employers as well as coming or recent government vaccination mandates for certain groups of workers also may have dampened job growth last month as some workers who refuse to get vaccinated quit, Goldman said. 

The number of employees working and the number of hours worked declined last month, according to Homebase, which supplies payroll software to small businesses.

More job gains ahead?

The good news is the variant appears far less severe than the previous delta strain and is likely to peak in the next few weeks and peter out by March, health experts say. That should set the stage for slower but still booming employment gains of about 330,000 a month this year, according to Moody’s.

Megan Shroy, CEO of Columbus-Ohio-based Approach Marketing, expanded her staff of full-time workers and contractors by about 40% last year and expects to grow it by another 20% in 2022 amid surging demand. Clients, she says, are still making up for cutbacks in their public relations and digital marketing outlays in 2020, when the health crisis upended the economy.

Shroy says she hasn’t been affected by the labor shortage because all her employees work remotely and she allows them to toil flexible hours and part-time if they need to, catering to a new COVID-spawned mindset that balances work and personal life.

“We’re getting a lot of candidates (from companies that are requiring employees to return to the office) who are saying, ‘This is what I prefer.”