Private payrolls unexpectedly declined in January as the Omicron variant's spread contributed to a marked weakening in the labor market at the beginning of the year.

U.S. private sector employment fell by 301,000 in January, ADP said in its closely watched monthly report on Wednesday. That represented the first drop in payrolls since December 2020, and came after 776,000 payrolls were added back in December, based on ADP's revised monthly print. Consensus economists had anticipated that about 180,000 private payrolls would return in January, according to Bloomberg data.

Service areas of the economy saw some of the largest declines in payrolls, with industries most vulnerable to virus-related disruptions posting some of the biggest losses. Leisure and hospitality jobs fell by more than 150,000 in January, unwinding some recent gains during the recovery. This was followed by trade, transportation and utilities jobs, which together declined by 62,000 in January. Education and health services payrolls fell by 15,000.

Private employers in goods-producing industries also shed payrolls on net during the month. Both manufacturing and construction payrolls dropped in January, by 21,000 and 10,000, respectively.

The January payroll report marks the first to capture a comprehensive picture of the impact the Omicron variant has had on the U.S. economy and labor market. The highly contagious variant first discovered in the U.S. in late November had not yet spread widely enough by the survey period for the December monthly report to generate a meaningful impact on the results.

And even the latest jobs data may underestimate exactly how many individuals dropped out of the workforce either temporarily or longer-term due to illness or fears of becoming ill, some economists suggested.

"The payroll methodology means that many people who miss a few days' work, even in the survey week, don't drop out of the count. Payrolls include people who did any paid work in the pay period covered by the survey week," which takes place mid-month, Ian Shepherdson, chief U.S. economist for Pantheon Macroeconomics, wrote in a note. "So people paid semi-monthly, bi-weekly, or monthly will still appear in the payroll even if they were absent from work for the whole survey week, as long as they did some paid work during the pay period."

Heading into Wednesday's report, other labor market data have also pointed to some softening due to the latest variant and ongoing virus-related disruptions. New weekly unemployment claims spiked back to nearly 300,000 in mid-January after setting a 52-year low of 188,000 about a month earlier. And while the Institute for Supply Management's latest manufacturing employment index expanded for a fifth straight month, hiring gains were "somewhat offset by continued challenges of turnover (quits and retirements) and resulting backfilling," the firm said earlier this week in its latest monthly report.

The latest labor data "continues to confirm that the problem is mostly supply driven," Ludovic Subran, Allianz chief economist, told Yahoo Finance Live on Tuesday. "You continue to have a labor participation issue in the U.S. rather than just a wage conundrum or any type of other issue."

More labor market data will also emerge later this week, with the Labor Department's official monthly jobs report due out Friday. ADP typically serves as an imprecise indicator of what to expect from the government jobs data due to differences in survey methodology, given that the Labor Department tracks only workers paid during the month rather than all active employees at a company.

Consensus economists are expecting the Labor Department data to show 150,000 non-farm payrolls returned in January, slowing further from the 199,000 brought back in December. If the results come in as expected, it would mark the slowest pace of hiring since December 2020.

This post is breaking. Check back for updates.

—

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

Read the latest financial and business news from Yahoo Finance

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, YouTube, and reddit