US positioned to withstand economic shock from Ukraine crisis

As Russian President Vladimir Putin launched a war against Ukraine, half a world away, the U.S. economy appeared to be rebounding from a winter surge of Covid-19 infections.

A range of U.S. data suggests U.S. economic activity picked up in recent weeks. Many Wall Street analysts expect the Labor Department on Friday to report large job gains in February and a further decline in unemployment.

These developments suggest that the U.S. is in a position to withstand the economic shock that might emanate from battlegrounds in Ukraine. Those effects could push U.S. inflation higher from already elevated levels, but the economic expansion appears to be on solid ground.

"It looks like the U.S. has gotten through the Omicron variant and weathered that storm and the economy is growing solidly," said Mickey Levy, chief U.S. economist at Berenberg Capital Markets LLC, the securities arm of a German bank.

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Much could change in the days or weeks ahead. If fighting intensifies or spreads to other countries, or if sanctions and Russian reprisals to sanctions deepen, the effects could hit the U.S. economy harder.

But for now, Mr. Levy has been watching weekly signs of rising U.S. consumer spending and output in February. OpenTable Inc., the online restaurant reservation business, reports that U.S. restaurant seating broke 6% above pre-pandemic levels in February after slumping earlier this year.

STR LLC, a research firm that tracks hotel trends, said occupancy at U.S. lodgings hit 59% in mid-February, up from 50% early in the month and 45% during the same period a year earlier.

Meantime, the Transportation Security Administration said airport checkpoint counts hit 2.15 million in late February, compared with 1.54 million at the end of January and 1.19 million at the same time a year earlier.

Mr. Levy said these are important developments because they suggest resurging life in the services side of the economy, which has been hit the hardest by pandemic-driven disruptions.

U.S. Covid-19 cases and hospitalizations dropped substantially in February and deaths have fallen in recent weeks with a lag.

In all, consumer spending in the first half of February was up 7.2% from a year earlier, compared with a 2.7% increase in the first two weeks of January, according to data from Earnest Research, which tracks credit- and debit-card purchases.

Economists at Citigroup estimate the Labor Department will report Friday that U.S. payrolls grew by more than 500,000 in February and the jobless rate fell to 3.8%. Morgan Stanley estimates payrolls grew 730,000 in February and the jobless rate dropped to 3.7%. In 2021, monthly payroll increases averaged 555,000. In the decade before the pandemic, monthly increases of around 150,000 to 200,000 were more normal.

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The U.S. economy is exposed to Russia and Ukraine mostly through energy channels. Russia is a major supplier of oil and gas supplies to the globe—especially Europe—and also supplies commodities such as potash and palladium that are important components of goods including fertilizer and catalytic converters for cars. The war and the Western financial sanctions resulting from it have disrupted supplies and pushed up prices for these and other commodities, worsening global inflation.

However analysts so far aren’t forecasting a big hit to U.S. economic growth from these effects. Chris Varvares, head of U.S. economics at IHS Markit, an economic advisory firm, estimates higher oil prices will shave 0.4% percentage point from the U.S. growth rate in 2022, to 2.5% for 2022 from its prewar forecast of 2.9%, and have almost no effect in 2023 and 2024.

Moody’s Analytics, another economic advisory firm, estimates a sustained move of oil prices up to $100 a barrel would slightly sap U.S. consumer spending in other markets, but not in a highly disruptive way. It estimates a shock of this kind would shave just 0.2 percentage point off the U.S. growth rate in 2022. The firm has already lowered its growth forecast to 3.5% this year, from its forecast of 3.7% before the war, said Mark Zandi, its chief economist.

"The impact of the Russian invasion on the U.S. economy will be on the margins," Mr. Zandi said in a written assessment of the impact of an oil price spike.

One risk is that higher U.S. inflation provokes the Federal Reserve to raise interest rates aggressively, which could hit growth by restraining domestic investment and spending through more costly borrowing. Fed officials have been telegraphing for weeks that they plan to raise short-term rates in March. If inflation accelerates or persists, Fed officials might feel forced to lift rates more than otherwise.

At the same time, Russia isn’t a dominant player in the global economy outside of certain commodities markets. It produces about $1.5 trillion annually in goods and services, less than countries including India, South Korea and Italy.

Its economic output is about equal to that of Iowa, North Dakota, South Dakota, Kansas, Minnesota, Missouri and Nebraska, combined. Excluding Russia’s energy sector, its economy is more like the combined size of those states minus Missouri. Texas’s economy is nearly 25% larger than Russia’s.

Financial markets are another channel through which shocks can be transmitted from one place to another. In the late 1990s, the collapse of the Russian ruble contributed to global financial disruptions that sent a cascade of developing economies into recession and roiled U.S. markets.

So far that kind of contagion doesn’t appear to be taking place. Stock indexes in Brazil and Argentina, for example, are up 8% and 5%, respectively, so far this year. Stocks in Thailand are up 2% so far this year and they are up 5% in Indonesia and 4% in Singapore.

Mr. Levy said U.S. bond markets also are functioning normally, unlike March 2020, when Covid-19 hit and froze U.S. Treasury bond transactions, or 2008, when mortgage securities’ values tumbled and squeezed the health of many banks.

"Nothing jumps out to me that suggests unhinged stability," Mr. Levy said. "You have more volatility but you don’t see dysfunction. You see a normal, predictable flight to quality."

Yields on 10-year U.S. Treasury notes have fallen from near 2% at midmonth to below 1.9% since the Russian invasion. Lower U.S. yields aid domestic activity by supporting U.S. mortgage markets and domestic corporate borrowing.

Of course, the effects could worsen. For example, if energy supply shortages drive Europe into recession, then a shock to its banks or consumers could spread more widely to the U.S. and other countries.

But other reverberations might benefit the U.S. Rig counts at U.S. drillers for gas and oil have been rising, and at a faster pace in recent weeks, according to Baker Hughes, the drilling supplier. Higher rig counts are an indicator of more domestic energy investment. In late February, rig counts were up 62% from a year earlier, greater than an annual change of 59% in late January. Rising oil and gas prices could give producers more incentive to drill in the U.S. despite a domestic push against carbon-based energy sources.

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Chevron Corp. and ExxonMobil Corp. have said they plan to increase spending this year in the U.S. Permian Basin, an area of the Southwest where shale wells produce rapidly, giving the companies flexibility to respond to higher prices. But the two oil companies and smaller drillers have said they plan to be conservative about plowing too much back into wells at a time when the nation is pushing in another direction.