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The U.S. economy added just 199,000 jobs in December and the unemployment rate fell to 3.9 percent from 4.2 percent, capping a year of volatility in the labor force that matched the contours of Covid-19 case loads.

The December data, released Friday by the Bureau of Labor Statistics, fell far short of economists’ expectations of 422,000 job gains. 

Labor market observers suggested that even more volatility is on the horizon as the omicron surge throws a wrench into school reopenings, corporate return-to-office plans, large events and other benchmarks of economic normalcy. 

“The volatility incurred by omicron sweeping across America means that the data point of today is basically useless in assessing tomorrow,” said George Ball, chairman of financial services firm Sanders Morris Harris.

The volatility incurred by omicron … means the data point of today is basically useless in assessing tomorrow.”

Economists noted the barrage of mixed messages coming out of recent job market data: The BLS report came two days after private payroll processor ADP reported that the private sector added 807,000 jobs in December, more than double what economists projected, while the Labor Department’s Job Openings and Labor Turnover Survey reported on Tuesday that a record 4.5 million Americans quit their jobs in November. Yet new weekly jobless claims released Thursday found a surprising increase of 7,000, although at 207,000, the figure remains below historic norms.  

“There is a lot of churn in the labor market right now. We’ve seen that with the JOLTS data. There’s a lot of factors playing into this one,” said Charlie Ripley, senior investment strategist at Allianz Investment Management. “I think the omicron headline news and the issues around case counts could be a factor.”

The sluggish labor force participation rate adds to the confusion, said Sam Stovall, chief investment strategist at CFRA Research. “You’ve got many people quitting their jobs looking for better opportunities but then you also have baby boomers saying, ‘why do I need to worry about getting sick on the job?’” and retiring, he said — cross-currents that make it difficult to decipher real-time labor market health.

Given the backwards-facing view of the monthly BLS report, which is drawn on data generally collected around the 12th of each month, the full impact of the ongoing omicron wave has likely not yet manifested in the data, said Tendayi Kapfidze, head of economic analysis at U.S. Bank.  

An acute shortage of workers could drive up wages, resulting in higher prices paid by American consumers.

“That’s when there was a lot of news flow around omicron but then, the numbers hadn’t taken off. That suggests to me these numbers will not have a significant omicron effect,” he said. “The question for me is, what’s going to happen in January and February?”

“Omicron is impactful in three different ways,” Ball said. In the short term, paralyzing corporate return-to-office plans means fewer jobs at restaurants and shops in downturn urban cores. In the medium term, the threat of school closures could pressure more parents, especially mothers, into remaining on the sidelines of the job market. And in the longer term, consumer demand will evolve differently if people expect Covid to become an endemic public health and economic challenge. Consumer behavior could especially be impacted if the threat of more virulent strains is high. 

Omicron also has threats for labor market inflation. “There’s going to be some hesitation on the part of employees coming back to work,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott. “Employers continue to report how difficult it is to hire.”

Short-term but acute shortages of workers across key supply chain sectors could drive wages up higher, resulting in higher prices paid by American consumers. “Because the trajectory of the omicron cases has been on a steady ascent, I think one of the concerns that investors have is… the inflationary peak will not occur in Q4 as originally forecast, and might not even occur in Q1, but could be pushed out,” Stovall said. 

This, in turn, has implications for how quickly the Federal Reserve moves to tighten policy by raising rates, said Timothy Horan, chief investment officer for fixed income at Chilton Trust. “The Fed’s emphasis on full employment needs to shift… It’s now on a mission to bring inflation down,” he said. “It can’t get held up by the immediacy of omicron.”

The minutes of the Fed’s December meeting, released on Wednesday, signaled that members of the policymaking Federal Open Market Committee might begin raising rates as early as March and plan to trim the central bank’s balance sheet more quickly to try and ward off inflation.

This more hawkish tilt triggered a slide on Wall Street on Wednesday afternoon, as investors calculated the impact of more expensive borrowing costs.