Strong Jobs Report Takes Back Seat to Ukraine
The release of labor market data is usually the monthly highlight for economists and financial markets alike. But the Russian invasion of Ukraine, and the world’s response of inflicting financial shock and awe, made the strong jobs report take a back seat to geopolitical uncertainty.
Because the rest of the news is so bleak, let’s begin with the better-than-expected February employment report. The economy added 678,000 new positions last month and positive revisions to the two previous months means that the economy has added an average of 588,000 jobs per month over the past 90 days, quite a feat, considering the impact of the Omicron variant. The BLS notes that non-farm employment is now just 2.1 million lower (1.4 percent) than it was two years ago, before the pandemic cratered the economy and the jobs market.
The unemployment rate fell to 3.8 percent, closing in on the February 2020 level of 3.5 percent, which was a 50-year low. That rate fell for the right reasons, more people entered the labor force and got jobs. Hiring was widespread among sectors, including Leisure and Hospitality (+179K), Professional and Business Services (+95K), Health Care (+64) and Construction (+60K).
One area of concern within the report was average hourly earnings, which increased by 5.1 percent from a year ago. Diane Swonk, Chief Economist at Grant Thornton notes that although wage growth slowed from the January pace, it “reflects the return of lower wage jobs. Gains for nonsupervisory workers rose 0.3 percent during the month, which held year-over-year gains at 6.7 percent. That is stunning.”
Still, the gains may not be enough. Many workers are struggling to absorb higher prices, because with inflation running at a 40-year high of 7.5 percent, large numbers of Americans are falling behind in 2022. Last year, the news was better on the inflation-adjusted wage front. According to the Penn Wharton Budget Model (PWBM), “increases in wage earnings in 2021 offset the higher cost of living due to inflation for most households with incomes between $20,000 and $100,000. Higher-income households saw their earnings rise by more than their cost of living.” If that all sounds too good to be true, PWBM says that the lowest-income households (below $20,000) saw their earnings rise by only one third of their increase in cost of living.”
This year, it will be harder for Americans to absorb higher prices. The Russian invasion of Ukraine has already caused oil prices to surge above $110 per barrel, $20 higher than they were prior to the war. Prices at the pump have jumped accordingly. According to AAA, a gallon of regular gas soared by $0.26 from a week ago, and $0.41 cents a month ago. Those prices could keep rising as the international community exerts pressure on Russia’s giant energy exporting economy.
Financial Shock and Awe
Western counties seek to exile Russia from the global financial system. Although these actions have not prevented Putin from advancing on the ground in Ukraine, they seek to punish Russia for doing so. The first stage was to begin the process of expelling Russian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT). SWIFT is a Belgian-based organization that was founded in the 1970s. It has become the secure messaging system that underpins the movement of money across borders. SWIFT is not a payments system, it’s how banks make transfer requests to one another and has become essential in the global economy, handling millions of daily requests.
When Russia exports natural gas to Europe, payment requests for that transaction are made through SWIFT. And when Western banks are owed money from Russian-based entities, they too would use SWIFT. Excluding Russian banks from SWIFT could make it difficult, if not impossible, for Russian companies to get paid for goods and services, though at this time, the Russian banks that handle energy and some agricultural products, remain in the SWIFT network.
The more damaging part of the financial shock and awe came from the Treasury Departments of G-7 economies, which said that they would freeze Russian central bank assets that are held within their banking systems. Why is this so important? Because Russia has been able to squirrel away over $640 billion in foreign currency reserves, mostly due to its huge oil and gas production. Icing out the Russian Central Bank means that a large portion of that money, which Putin thought would be available to support the Russian economy and defend its currency against domestic inflation, was no longer within his grasp.
The U.S., in close coordination with the European Union, United Kingdom, Canada, Japan, the Republic of Korea, and Australia, has also tried to isolate Russian oligarchs “by sanctioning numerous Russian elites and their family members, identifying certain property of these persons as blocked, and sanctioning Russian intelligence-directed disinformation outlets.”
The elephant in the room is Russia’s energy sector, which has thus far been shielded from the Western sanctions. Fear not, say oil analysts. The global market is avoiding Russian oil for fear that there will be sanctions, and there is also a moral component to companies in the West, who do not want to be seen supporting the aggressor regime of Putin.
The West’s financial shock and awe efforts of the war’s first week have already wreaked havoc in Russia, with the ruble down by 30 percent and the Russian stock market, which has been closed for most of the week, also down by a third. More importantly, ordinary Russian citizens who will eventually see their purchasing power diminish in the form of higher prices, will no longer be able to purchase foreign goods, like iPhones from the U.S. and luxury goods from Italy, and will not be able to send or receive money from friends and relatives who are abroad. The financial “shock and awe” has attempted to make Russia the world’s largest island-state.