The United Auto Workers (UAW) strike against the Big 3 carmakers has raised concerns among stock-market investors regarding the future of corporate profits. Mark Hackett, chief of investment research at Nationwide, warned that if the strike expands, it could have a negative impact on the overall economy, supply chains, and corporate profit margins.
The UAW initiated picket lines simultaneously at Ford Motor Co., General Motors Co., and Chrysler owner Stellantis NV. Workers from Ford, Stellantis, and GM factories in Michigan, Ohio, and Missouri respectively have already joined the strike, leaving room for further action across other facilities.
The stock market experienced a decline on Friday as a result, with the S&P 500 down 1.1% and the Dow Jones Industrial Average declining by around 275 points or 0.8%. The Nasdaq Composite also shed 1.6%.
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The initial wage increase demand from the UAW was 40% over four years. However, they are now pushing for an increase in the mid-30% range. In comparison, American Airlines agreed to a 40% raise for pilots over four years, while United Parcel Service reached an agreement to increase pay for unionized workers by 18% over five years. Notably, a strike by film and television writers also continues.
These labor disputes occur amidst a tight job market that has surprisingly held up well despite aggressive rate hikes by the Federal Reserve.
Mark Hackett emphasized that labor issues in various sectors, such as Hollywood and airlines, could only act as a headwind to profit margins.
The Rise in Real Wages and Potential Disruption to the Economy
According to experts, there is a continuous increase in real wages that may not be fully recognized. There are expectations for a 12% growth in earnings by 2024; however, some argue that this may be too optimistic.
Additionally, there is a potential threat of a broader disruption to the economy.
Strike Impact and Potential Price Increases
Currently, around 13,000 members of the UAW (United Automobile Workers) out of a total of 146,000 are on strike at three targeted plants. Paul Ashworth, Chief North America Economist at Capital Economics, suggests that while the overall impact on GDP should be limited, strikes could lead to production backlogs, causing new supply shortages and driving prices higher.
Corporate Margins: Past and Future Trends
A team of strategists led by Binky Chadha at Deutsche Bank notes that corporate margins reached their peak in the second quarter of 2021 as inflation started to accelerate. However, they fell for six consecutive quarters due to the reversal of the pandemic boom. On a positive note, margins hit their lowest point in the final quarter of last year and have since rebounded in the last two quarters thanks to the recovery of real growth.
The Link Between Labor Markets and Productivity Growth
The Deutsche Bank strategists suggest that tight labor markets are seen as a prerequisite for productivity growth. They state that historically, rapid productivity growth phases have been preceded by tight labor markets, as companies are incentivized to adopt new technologies. This has led to notable growth in real wages and returns on investment in the past.
Artificial Intelligence: A Potential Productivity Boom
Early estimates suggest that artificial intelligence (AI) could drive a productivity boom. The timing and magnitude of this boom are uncertain, but it is expected to be similar to the productivity boom of the 1990s attributed to tech investments. This previous boom resulted in substantial growth in real wages and returns on investment during the late 1990s.
Overall, the rise in real wages, strikes, potential price increases, and fluctuations in corporate margins are key factors to consider when assessing the current economic landscape. Additionally, the link between tight labor markets and productivity growth, as well as the potential impact of AI on future productivity, are areas of interest for economists and analysts alike.
