By Lucia Mutikani
WASHINGTON (Reuters) - U.S. private payrolls increased more than expected in December, pointing to underlying labor market strength, but skyrocketing COVID-19 infections could slow momentum in the months ahead.
The surge in private hiring in the ADP National Employment Report on Wednesday was based on data collected in mid-December just as the Omicron variant was sweeping across the country, causing some events and hundreds of flights to be canceled.
"The labor market continues to recover," said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania. "However, the Omicron variant is a substantial downside risk to the near-term labor market recovery."
Private payrolls jumped by 807,000 jobs last month, the most in seven months, after rising by 505,000 in November. Economists polled by Reuters had forecast private payrolls would increase by 400,000 jobs.
The ADP report is jointly developed with Moody's Analytics and was published ahead of the Labor Department's more comprehensive and closely watched employment report for December on Friday. It has, however, a poor record predicting the private payrolls count in the department's Bureau of Labor Statistics employment report because of methodology differences.
Economists anticipate some disruption from the winter wave of infections, though not on the scale of last summer. The hit to the labor market is expected to show in the January data.
The United States reported nearly 1 million new coronavirus infections on Monday, the highest daily tally of any country in the world.
Airlines have canceled flights and some school districts have suspended in-person learning as workers called in sick.
"Most of those absentees will still be paid and therefore counted as employed this month," said Michael Pearce, a senior U.S. economist at Capital Economics in New York. "But a significant minority who do not have access to paid sick leave will not, potentially knocking hundreds of thousands off the official non-farm payrolls tally in January."
Stocks on Wall Street were trading mixed. The dollar fell against a basket of currencies. Yields on shorter-dated U.S. Treasuries rose.
Still, demand for labor is strong amid an acute shortage of workers. The broad increase in private hiring last month was led by a rise of 246,000 in the leisure and hospitality industry. Professional and business services added 130,000 jobs.
Manufacturing hired 74,000 more workers and construction payrolls increased by 62,000 jobs. Hiring at construction sites is being supported by a strong housing market, though rising mortgage rates could slow demand.
A separate report from the Mortgage Bankers Association on Wednesday showed applications for loans to buy a home declined over the past two weeks. Though the data can be volatile around holidays, it was in line with other indicators that have suggested the housing market could be losing steam. Contracts to purchase a previously owned home fell in November.
Despite the ADP report's spotty track record in predicting the private payrolls component of the Labor Department's monthly employment release, last month's jump was another sign that job growth probably accelerated in December.
The government also surveyed businesses and households for last month's employment report in mid-December.
Economists at Goldman Sachs raised their December payrolls estimate by 50,000 to 500,000 after the ADP release.
"But the ADP report is at least broadly supportive of our view that the labor market is continuing to tighten despite the recent COVID spread and some signs that consumer activity has weakened lately," said Daniel Silver, an economist at JPMorgan in New York.
First-time applications for unemployment benefits declined significantly between mid-November and mid-December. The Institute for Supply Management's measure of factory employment rose to an eight-month high in December, with manufacturers noting an improvement in labor supply.
According to a Reuters survey of economists, private payrolls likely increased by 365,000 jobs in December. Overall nonfarm payrolls are forecast to rise by 400,000 jobs. The economy created 210,000 jobs in November.
But worker shortages are constraining the labor market's recovery. The government reported on Tuesday that there were 10.6 million job openings at the end of November.
There were signs in November that unemployed Americans were starting to slowly return to the workforce, but the rising coronavirus infections could force some to stay home.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao)