December Jobs Report: Omicron Hampering Economic Recovery

Dr. Bernard E. Anderson
Whitney M Young, Jr. Professor Emeritus, The Wharton School, University of Pennsylvania
Senior Economic Advisor, National Urban League

December’s jobs report, which revealed sluggish job growth but better-than-expected wage growth and overall unemployment rate, reveals that the Omicron surge is hampering an otherwise rapid recovery from the pandemic-induced economic crisis.

Thanks to the size and scope of the rapid public policy response, the economy has bounced back faster from COVID-19 than from the Great Recession.  In 18 months, economic activity has recovered 80 percent from the pre-pandemic high; it took six years for the economy to regain that level of activity following the great recession.

Though payrolls rose by only 199,000 in December, the economy has regained 84 percent of the jobs lost in the pandemic and the unemployment rate fell to 3.9 percent.

However, while the white unemployment rate fell for the fifth straight month, Black unemployment rose to 7.1%, more than twice the white rate of 3.2 percent.

This is a classic example of structural unemployment, and along with the demonstrated effectiveness of the American Rescue Plan, demonstrates the urgency for enacting of the Build Back Better Act.

Throughout the country, economic activity grew at a moderate to strong pace.  Aggregate demand was boosted by two multi-trillion-dollar federal stimulus programs that were enacted when the pandemic struck in early 2020.  The programs increased the value and expanded the eligibility for unemployment compensation, sent cash to almost every household, and distributed forgivable loans to businesses to forego layoffs. 

The major challenge in the 2022 economic outlook is elevated inflation.  In October, the Consumer Price Index (CPI) surged 6.2 percent above the previous year. Higher prices are widespread among most consumer goods and services, as well as production inputs.  Higher production costs are being passed along to consumers as producers attempt to maintain profits. 

The inflation spike was initially thought to be transitory because it appeared to be generated by global supply chain bottlenecks.  But the persistence and breadth of elevated inflation reflected in both the CPI and Personal Consumption Expenditure index (PCE), the major prices indexes might raise inflation expectations that will distort consumer spending and business investment. As a result, the Federal Reserve initiated the process of trimming asset purchases to reduce the money supply and announced the intention to raise interest rates at least twice in 2022. 

In contrast to previous business cycles, current inflation is not generated by wage increases. Labor shortages and increasingly tight labor markets have led many employers to raise wages, but they are attempting to retain workers and increase hires to fill job vacancies. The availability of labor is hampered by increasing retirements, and the high cost of childcare which constrains increased labor participation by working mothers.

In short, the economic outlook is burdened by uncertainties over the impact of Omicron on business activity and the impact of elevated inflation.  Both will delay the return to normalcy from the greatest health crisis the nation has experienced in a century.