US private sector employment unexpectedly drops in January

Employment declined by 301,00 from December, versus expectations for a 207,000 jump. Meanwhile, the December total of jobs added was revised from 807,000 to 776,000.

Small businesses with fewer than 50 employees shed 144,000, while medium businesses with between 50 and 499 employees lost 59,000 jobs. Large businesses with more than 500 employees saw a 98,000 drop.

The services sector shed 274,000 jobs, while the goods-producing sector saw a 27,000 decline. Leisure/hospitality suffered the biggest drop, at 154,000.

Nela Richardson, chief economist at ADP, said: "The labour market recovery took a step back at the start of 2022 due to the effect of the Omicron variant and its significant, though likely temporary, impact to job growth.

"The majority of industry sectors experienced job loss, marking the most recent decline since December 2020. Leisure and hospitality saw the largest setback after substantial gains in fourth quarter 2021, while small businesses were hit hardest by losses, erasing most of the job gains made in December 2021."

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said: "This was a real wild card, given the uncertain impact of the Omicron wave. More than 5m people - officially - were infected in the week of the payroll survey, but they only dropped off payrolls if they did zero paid work during the pay period covered by the survey week and received zero paid sickness leave. That’s quite a high bar, so we’re not surprised that the ADP hit is nothing like as big as the number of people who reported absence due to sickness for some part of the month.

"ADP’s numbers are not a reliable guide to the official payroll print, so we aren’t changing our -300K forecast for Friday’s number. These data, and probably February’s too, will always be asterisked; they tell us nothing about the underlying state of the labour market. The first fully post-Omicron report will be for March, and recent history suggests all the lost ground won’t be recovered immediately. It’s possible, then, that the Fed will sit down in early May - before the April payroll report - with the latest numbers showing payrolls lower than in December."

Michael Pearce, senior US economist at Capital Economics, said the large decline in leisure and hospitality payrolls suggests that virus fears prompted a bigger fall in demand in the services sector than he had initially suspected.

"But the sheer number of infections this wave caused chaos in the rest of the economy too, with manufacturing payrolls down 21,000, trade, transport and utilities employment falling by 62,000, and construction payrolls dropping by 10,000. Because the ADP figures count everybody on payroll as employed regardless of whether they worked or not, they do not capture the full hit from the omicron-related surge in absenteeism.

"With an estimated 5m Americans isolating mid-month, we suspect close to half a million of those won’t have been paid at all during the survey period, which wasn’t captured in the ADP figures, but will show up as a decline in the official non-farm payrolls due out on Friday. As a result, there might be even larger decline than the 200,000 drop we had forecast."