Into Perspective: The US Auto Labor Dispute and Recession Worries

Editors’ Note: MarketMinder doesn’t make individual security recommendations. The below merely represent a broader theme we wish to highlight.

The “summer” portion of “hot strike summer,” as several journalists hipper than we are have termed it, is winding down—but the “strike” part appears to be no cooler. Barring an unexpected last-minute breakthrough, the United Auto Workers (UAW) will commence a “limited strike” against the Big Three US automakers (e.g., Ford, General Motors and Stellantis) Friday. Unsurprisingly, as the deadline draws close, we are seeing more and more chatter about a stoppage inflicting economic damage by reigniting inflation (via higher auto prices) as well as whacking output. One outfit even claims a prolonged strike could induce recession. We think this is all rather a stretch and doubt there is much risk here for the economy or stocks broadly.

Industrial actions, like politics, can be a hot topic sociologically, inducing emotional reactions and inviting biases to take over. So as with politics, we think it is paramount to come at this issue objectively, without preference to either side and without letting sociological implications weigh in. Thus, our focus here will be quite narrow: Are the claims about a strike’s potential impact on inflation and economic growth likely to prove true?

We don’t think so. Let us start with the inflation aspect. Some are drawing comparisons with pandemic-related supply disruptions, which led to a severe auto shortage in 2021—one of the early inflation drivers. Yet there are some key differences. For one, a strike would impact only a portion of US output, making it irrelevant to production across Europe, Asia, Mexico and the rest of North America. Two, strikes are by nature quite temporary, while those pandemic-related disruptions dragged on in part due to global lockdowns and other disruptions. Three, it wouldn’t sideline all US auto output, and not just because the UAW is planning only a partial stoppage at present. There are also foreign-owned and non-UAW plants in America, and these account for a significant portion of production and sales. Couple this with the fact that new cars in total are just 4% of the US CPI basket, and we doubt there is enough of a disruption to move the needle on consumer prices overall.

As for the economic impact, it seems fair to say a stoppage would be tough on Michigan, where many of the affected plants are located. One report gaining traction this week noted that the UAW’s six-week strike against GM in 2019 led to a “single-quarter recession” in Michigan, which we guess is a handy way of discerning between the -0.5% annualized drop in state GDP in Q4 2019—coinciding with the strike—and the lockdown-induced plunge that followed immediately after.^[i]

But it isn’t unusual for the US economy to have pockets of weakness in some states or industries and strength in others. It is actually quite normal, and economic growth is the balance of those plusses and minuses. In good times, the growing areas offset those facing larger headwinds. This is what happened in Q4 2019, when US GDP grew 1.8% annualized despite the strike’s hitting Michigan output.^[ii] And it is likely what would happen in the event of a UAW strike now.

One group estimates the cost of a full 10-day stoppage at $5.6 billion—with $3.5 billion from lost wages and output and another $2.1 billion from consumers, dealers and employees as replacement parts dry up.^[iii] Taking this at face value, $5.6 billion barely registers as a share of the US’s nearly $26.8 trillion in nominal annual GDP.^[iv] Also, that is the estimated cost of a full stoppage, which is broader than the “limited” action currently on the table. Under the UAW’s present plan, many plants would stay open, keeping more workers on the job and more cars and parts rolling off the assembly line. So we are skeptical the impact would even reach $5.6 billion. A longer strike would add up, but we are likely talking a couple tenths of a percentage point shaved off GDP growth at the most, and auto strikes tend to be short-lived.

As for markets broadly, without a material macroeconomic effect from the strikes, there is little to suggest a UAW strike poses a threat to this young bull market. Markets routinely look past temporary, expected events like this, just as they have seen through several other industrial actions this year in the US and abroad.

HT: Fisher Investments Research Analyst Jake Riddell