September 15, 2023 | 13:58
Will the Auto Strike Drive the Economy off a Cliff?
The first strike by North American auto workers in four years began Friday with the UAW announcing walkouts at three plants, while threatening wider-scale action. This is the first-ever strike simultaneous against all three major automakers, though it is currently limited to less than 13,000 workers. Depending on duration and scope, the strike could derail the expansion and complicate the central bank's already-tricky job of piloting a soft landing.
The economic impact will hinge on how long the strike lasts and how many plants are closed. The last major strike was in October 2019 when 46,000 GM workers walked off the job for 40 days. Real GDP turned slightly negative that month and, led by big declines in motor vehicle production and sales, downshifted sharply to a 1.8% annualized rate that quarter from 3.6% in the prior quarter. In 1998, a GM strike lasting 54 days was estimated to have cut one-half percentage point from annualized GDP growth in the second quarter of the year.
If ramped up to cover all 146,000 workers at the Big Three, a strike could cause more damage than the previous two major walkouts. Auto manufacturing and retail account for just under 2% of U.S. industry GDP, with the Big Three accounting for less than half of national sales and production. Anderson Economic Group estimates a full strike of over 140,000 workers lasting 10 days would lead to economic losses of $5.6 billion, based on lost wages and profits in the industry and multiplier effects on other sectors. So, a full strike could shave Q3 GDP growth by an annualized 0.6 ppts, though the very limited action currently underway suggests a much smaller impact, likely less than 0.2 ppts. However, if a strike of all 146,000 workers persisted through year-end, it could take a 3-ppt chunk out of annualized Q4 growth. While production would come roaring back after the strike ended, the near-term hit would be severe, likely resulting in an outright contraction in the economy.
The strike won’t show up in the September jobs report, as the roughly 12,700 workers currently off the job were paid for at least part of the survey period, and thus will be included in the payroll numbers. If the strike lasts through the October survey period, however, payrolls would be affected. The household survey, which tallies the unemployment rate, won’t be impacted as workers on unpaid leave are still classified as employed.
Canada is also gearing up for a potential strike starting early next week at Ford. The auto industry accounts for a similar share of GDP as in the U.S. and the Big Three have roughly 18,000 hourly workers. Given the tightly integrated nature of auto production in the two countries, the impact could be equally severe and concentrated in Ontario. With Canada’s economy already on the cusp of recession, the strike could lead to a deeper downturn. In that event, the Bank of Canada would likely refrain from further rate hikes, at least until the strike ended.
A long strike could make already expensive automobiles even dearer. The initial price push would come from production cuts that severely drain recently improved inventories. After the strike settles, some of the increase in labour costs could get passed along to buyers, depending on demand conditions and industry profitability.
For the Fed, the economic turbulence from the strike would complicate its ability to balance demand and supply to restore price stability, thus lowering the odds on achieving a soft landing. While a short-lived walkout would be a mere speedbump for the expansion, a longer lasting and wide-scale strike could send the economy temporarily over the edge. Moreover, while the inflationary impact of higher auto prices could be readily discerned, and thus accounted for in policy decisions, any upward thrust to inflation expectations (combined with recent unwelcome pressure from rising oil prices) could spur a policy response that risks a much bumpier landing. Tighten your seatbelts.