The Potential Impact of the Auto Workers’ Strike on the US Economy

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The ongoing strike by auto workers may not immediately harm the United States, but if the dispute drags on for months, it could have negative consequences for the economy and potentially disrupt the Federal Reserve’s efforts to control inflation.

Partial Strikes and Limited Participation

Currently, the United Auto Workers (UAW) has been implementing their strike tactics in a piecemeal manner. Strikes have occurred at just three out of the 25 US plants operated by the major automakers, General Motors (GM), Ford, and Stellantis. Furthermore, less than 10% of the UAW’s total membership of 146,000 individuals have participated in the strikes.

While these initial tactics may not have a significant impact on the economy, they should not be dismissed outright. However, considering that the potential number of employees involved is still relatively small (less than 0.1% of the entire US workforce), and that automakers have strategically increased their inventory of new cars prior to the strike, the immediate effects are expected to be minimal.

The Potential for a Prolonged Stalemate

Nevertheless, a prolonged and comprehensive stalemate lasting several months or more could have more severe consequences.

S&P Global estimates that a short strike could slightly hinder US growth in the third quarter. However, if the impasse continues for a couple of months, it could shave over two percentage points off the gross domestic product in the fourth quarter.

Such a decline would have a significant impact on the economy. After all, 2% growth is generally considered a desirable target in the long run.

In an ideal scenario, any growth lost during this period would be recovered in subsequent months as striking auto employees return to work and automakers ramp up production. However, this assumption relies on the notion that a negotiated settlement will have little to no influence on US inflation.

Unfortunately, this is far from a certainty.

Wage Increase Demands vs. Company Offers

Currently, the UAW is demanding approximately a 35% increase in wages over four years, while the automakers have offered around 20%.

Either way, automakers will need to allocate more funds towards labor costs. The only feasible options to offset these increases are to accept lower profits, raise prices for car buyers, or, less likely, enhance the productivity of their workers.

In conclusion, the consequences of the auto workers’ strike on the US economy remain uncertain. While the immediate impact may be limited, a prolonged stalemate could have significant repercussions, potentially hampering growth and complicating efforts to control inflation.

Surging Car Prices and the Impact on U.S. Inflation

The surge in car prices has been a significant contributing factor to the inflation experienced in the United States during 2021 and 2022. However, the reasons behind this surge are quite distinct. A global shortage of computer chips has hampered the production of vehicles, resulting in a scarcity of cars available for sale. Consequently, this has led to a significant increase in prices for both new and used cars.

By the middle of 2022, car prices had risen by more than 20% when compared to the previous year. Although prices have since stabilized, purchasing a car remains incredibly expensive, reaching record levels.

Additionally, the United Auto Workers (UAW) union has reintroduced the concept of cost-of-living adjustments in labor contracts—a practice reminiscent of the 1970s and 1980s. The UAW is advocating for larger annual pay increases for workers in the event that inflation exceeds initial forecasts, while automobile companies prefer offering lump-sum bonuses instead.

During the 1970s, when unions had greater influence, cost-of-living adjustments acted as fuel in the wage-price spiral that contributed to soaring inflation and had a profound impact on the economy.

Bob Schwartz, a senior economist at Oxford Economics, commented on the significance of including this provision: “Whether it sticks remains to be seen, but its inclusion drives home the importance to the Fed of restoring price stability before inflation becomes more broadly embedded in the mindset of workers.”

The Federal Reserve is anticipated to closely monitor this dispute, especially with the Biden administration’s preparations for the 2024 presidential election. A prolonged standoff may result in a decreased number of vehicles available for sale, disrupt supply chains, and trigger another surge in prices.

Gus Faucher, chief economist at PNC Financial Services, emphasized the potential implications of an extensive UAW strike: “A broad, extended UAW strike would also cause headaches for the Federal Reserve’s fight against high inflation.” In the worst-case scenario, Faucher warned that “this could lead the Fed to raise the fed funds rate later this year to reduce overall demand in the U.S. economy, increasing the risk of recession in 2024.”

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