Thoughts

October 04, 2024 | 14:22

Ports Strike: The Needle and the (Potential) Damage Done

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

After a three-day strike, dockworkers along the East and Gulf Coasts returned to their jobs after reaching a deal that raises wages 62% over six years. The ports will remain open until at least January 15, while both sides discuss other issues, including the thorny topic of automation. The strike highlighted a couple of upside risks to the inflation outlook. The first is that many unionized workers are trying to catch up to the previous inflation spike by seeking wage increases well above current inflation. This can add stickiness to inflation, especially if productivity growth slows. The upturn in average hourly earnings in September might be Exhibit-A. The second risk is to supply chains. While the New York Fed’s global measure suggests supplies are flowing normally, a lengthy port strike could throw a serious wrench into the works.

The ports strike also highlights a key vulnerability to the U.S. economy’s apparent invincibility. There is still an outside chance of talks breaking down after January 15. The resulting turbulence would imply a rougher landing, depending on the duration of the shutdown. Dock closures disrupt the transportation, manufacturing, and retail sectors by halting the maritime trade of goods, parts, and supplies. The 36 ports at risk handle more than half of the country’s import and export volumes. Highly impacted industries include food, automobiles and parts, machinery, construction materials, and chemicals, though few industries would be untarnished if parts and supplies are severely delayed. However, exports of oil and LNG from the Gulf Coast would be little impacted as their dockworkers are not members of the International Longshoremen’s Association. While some ships can be rerouted to the West Coast, that’s an expensive option resulting in lengthy delays. As transportation and food costs rise and shortages worsen, inflation would catch a second wind.

Estimates of the economic cost of an East and Gulf coast ports strike are wide-ranging. The National Association of Manufacturers pegs it at up to $5 billion per day. By contrast, the Conference Board sees a lesser $0.54 billion daily hit if the strike lasts a week. These estimates are equivalent to 0.7% of annualized nominal GDP at the low end and 6.2% at the high end. A complicating factor is that much of the economic cost would be recovered (apart from the rotting food) after the strike ends, though it could take months to clear the backlog. In two earlier port strikes, the economy slowed meaningfully due to a widening trade deficit, before bouncing back once the walkout ended. During the 45-day strike that ran to mid-November 1977 along the East and Gulf Coasts, real GDP stalled in the fourth quarter, even as consumer and business spending remained strong, partly due to plunging exports and less inventory investment. During the much shorter 11-day walkout in October 2002 on the West Coast, real GDP came to a crawl before picking up moderately, largely due to wide swings in exports.

A short-lived strike of ten days or so would have a modest impact on our growth outlook. Many retailers would stockpile goods before the threat unfolded, keeping shelves full for a couple of weeks. The knife would come out, however, if a strike lasted several weeks.