Jobs Report Overshadowed by Russia, Ukraine

The uncertainty over the war in Ukraine overshadowed a strong employment report, which signaled the economy continued to expand into February.

The U.S. Bureau of Labor Statistics reported nonfarm payrolls rose an impressive 678,000 in February, and the unemployment rate fell from 4.0% to 3.8% in February, a pandemic low.

Despite the improvement, investors continue to keep tabs on what’s happening overseas.

As we’ve discussed, the U.S. has little direct exposure to Russia. According to the World Bank, South Korea’s economy is bigger than Russia’s, and Russia barely tops Brazil and Australia.

But Russia is a significant producer of oil, natural gas, wheat (Ukraine also exports wheat), and the tight supplies are likely to exacerbate inflation, at least in the shorter term.

The U.S. is relatively immune from global disruptions of natural gas, but look what has happened to the price of oil, which jumped over $24 last week to $115 per barrel.

Russia exports about 5 million barrels per day of oil, per the Wall Street Journal. The world uses about 100 million barrels of oil each day. While very little oil comes from Russia, Europe is much more dependent on Russian oil. The U.S. receives over half its imports from Canada.

So far, strict sanctions have not been levied on key Russian exports. Nevertheless, U.S. oil companies are backing away from Russia, refiners are hesitant to process Russian oil, and banks are reluctant to finance shipments.

Another release by the U.S. and other nations from respective strategic petroleum reserves last week had little impact on prices. And the vast amount of uncertainty is driving up oil prices.

Rising production at home helps mitigate some worries

Surging U.S. oil production over the last decade has reduced the country’s exposure to global supply disruptions. In late 2019 and 2020, the U.S. became a net exporter of oil and refined products. But oil moves around the globe with ease, so we are not immune to price shocks.

Higher prices will exacerbate inflation, at least over the shorter term. It could crimp economic growth, unless U.S. oil production accelerates at a much faster pace. It also complicates the Fed’s job, as it tries to rein in higher inflation.