• Judging by the opinions of some major Wall Street forecasters, employment either slowed to a crawl or perhaps even turned negative in January.
• ADP reported Wednesday that companies slashed 301,000 jobs in the month.
• PNC is expecting Friday's payrolls report to show a decline of 400,000 while Goldman Sachs is forecasting a drop of 250,000. Consensus forecast is for a gain of 150,000.

A jobs market that was on fire for most of 2021 looks like it was dealt a cold splash of reality to start the new year.

Judging by the opinions of some major Wall Street forecasters and fortified Wednesday by data from payroll processing firm ADP, employment in January either slowed to a crawl — or perhaps even turned negative.

ADP reported that companies subtracted 301,000 jobs during the month, spurred largely by swelling Covid-19 omicron cases and a wider slowdown in business conditions.

The report comes two days before the U.S. Labor Department releases its widely watched nonfarm payrolls count. Consensus estimates see a gain of 150,000 jobs, according to Dow Jones, but the drumbeat is building on Wall Street that the actual tally will be far lower. Even the White House last week cautioned that the report could be weak due to the impact of the omicron surge in January.

"The good news is that the job market should quickly bounce back as the omicron variant fades. Underlying demand in the economy is still strong, and businesses are still trying to hire," said Gus Faucher, chief U.S. economist at PNC. "But the January drop in employment is another reminder that the economy will not fully return to normal until the pandemic is over."

PNC is possibly the most pessimistic voice on the Street, with a projection that nonfarm payrolls contracted by 400,000 in January, including a 350,000 decline in the private sector.

The losses, Faucher said, "were likely due to a combination of factors," most of them related to Covid. They include workers either dealing with their own virus infections, or having to take care of sick family members, parents who managed kids who were not being able to go to school, and weaker demand in pandemic-sensitive industries like bars, restaurants and hotels.

That has become a familiar refrain in the economic community.

Goldman Sachs forecasts a 250,000 drop in payrolls due to "a large and likely temporary drag" due to the pandemic, while Citigroup sees a modest upside, with growth of just 70,000 jobs.

"The downside risk to payrolls has been well telegraphed and we would not be surprised, nor necessarily concerned, to see an outright decline in January employment that would likely bounce back in the coming months," Citi economist Veronica Clark said in a note.

Economists believe a sharp decline in Covid cases, in which the seven-day moving average has dropped about 45% in the past two weeks, will help resuscitate the jobs market. However, that average peaked on Jan. 15, which is the same week the Bureau of Labor Statistics uses as its sample for the monthly report.

A big reversal

The changing winds follow a record year for jobs — nearly 6.5 million payroll additions despite a modest pullback in the pace over the last two months of the year. The last time the BLS report showed a negative number was in December 2020.

However, the employment level remains 2.9 million below where it was pre-pandemic in February 2020. That's due to another confluence of events, including a surge in retirements, a general labor shortage that has seen job openings outnumber available workers by 4.6 million, and myriad impacts from the pandemic.

A decline in January would push the labor market even further back and could spur an early-year growth scare in which first-quarter GDP could show little gain and possibly a loss.

From a market perspective, stocks have been rallying the past four days, with some of the high-growth tech names leading the charge. But jitters over an economy slowing while the Federal Reserve is raising interest rates could inject some volatility back to Wall Street.

"If [Friday's report] comes in at minus [300,000], that might have some near-term impact," said Jim Paulsen, chief investment strategist at the Leuthold Group. "Even if you think we're going to get through it, it will scare you until that point."

Paulsen, though, is in the camp that sees the January numbers as temporary, a feeling generally shared among economists. He said it was likely that the market will look through the report and that the Fed likely will not be swayed off its course of raising rates to combat swelling inflation.

"As far as [the jobs market] being weak, I don't know if anyone's going to give it much credence," Paulsen said. "You've clearly got omicron cases collapsing. You're seeing some high-frequency data showing some pretty significant pickups. I just think that calms a lot of the marketplace."