A strike hitting ports along the Eastern and Gulf coasts could send prices for food, cars and a host of other consumer goods higher, but is expected to cause only modest, broader impacts — as long as it doesn't last too long.
Manufacturers of everything from trucks to toys to artificial Christmas trees are facing hurdles now that the International Longshoremen's Association has called for a halt at major eastern container and cargo ports.
From a macro perspective, the impact will depend on the duration. President Joe Biden, under powers granted under the Taft-Hartley Act, could step in and order an 80-day cooling-off period that would at least temporarily halt the pause, though there is no indication he would do so.
This will leave hopes in the hands of negotiators from the union and the US Maritime Alliance that the strike will not continue and cause greater hardship for the US economy as the critical holiday shipping season approaches.
“Labor action by port workers along the East and Gulf Coasts of the United States will provide a modest hit to GDP,” said Joseph Brusuelas, chief economist at RSM, estimating the weekly impact at just over 0.1 percentage point of GDP. And $4.3 billion in lost imports and exports.
He added: “Given that the US economy is on a 3% growth path at this time, we do not expect a strike to derail the domestic economy or pose a risk of a premature and unnecessary end to the current economic expansion.”
The truth is that the $29 trillion US economy has managed to avoid many landmines and has been in growth mode for the past two years. The Federal Reserve Bank of Atlanta is tracking 2.5% growth in the third quarter, helped by an acceleration in net exports.
But being out of work for a long period of time could threaten that.
Affected areas
Some of the major industries facing challenges include coal, energy and agricultural products. One rule of thumb is that for each strike day, it takes approximately a week for the ports to operate at normal levels.
“The costs of a strike will escalate over time as the backlog of exports and imports grows,” Andrew Hollinghurst, an economist at Citigroup, said in a note to clients. “Perishable products such as imported fresh fruit may be the first to experience shortages in supply. If the strike extends beyond a few days, shortages of some production inputs could eventually slow production and raise prices of manufactured goods such as cars.”
However, there are potential barriers to the damage a strike may cause.
For example, West Coast ports are expected to take over some of the freight business that would normally go to eastern ports. Some companies were also anticipating the downtime and stocking up ahead of time.
Moreover, the pressure on supply chains, which worsened sharply during the pandemic, has largely eased and is actually below pre-Covid levels, according to action taken by the Federal Reserve Bank of New York.
“We believe concerns about the potential economic impacts are overblown,” wrote Bradley Saunders, North America economist at Capital Economics. “Repeated shocks to supply chains in recent years have made producers more attuned to the risk of falling inventories. It is therefore likely that companies will have taken precautionary measures in the event of a strike – not least because the ILA has promoted this possibility for months.” “
Saunders added that he believes there is a strong possibility that the White House will step into the fray and resort to a cooling-off period, despite the administration's strong pro-union leanings.
“There is little chance the administration will risk jeopardizing its recent economic successes less than two months before the hotly contested election,” he said.
Threat of inflation
Meanwhile, there are a host of other issues that could complicate matters.
Hurdles in the supply chain could exacerbate inflation just as price pressures appear to have subsided from a peak in mid-2022 that sent the annual rate to its highest level in more than 40 years. The Maritime Union is proposing increases approaching 50%, another factor that could reignite inflation as wage pressures also ease. The union is looking for larger increases as well as guarantees against automation.
“This is obviously temporary. They will have some solution,” said Christopher Ball, an economics professor at Quinnipiac University. “However, in the short term, if it lasts more than a few days, if it lasts more than a week… that will certainly push the prices of a lot of those goods and services higher now. It may cause prices to rise.” “It goes up in the short term during a strike, and I can easily see that causing the prices of some commodities to go up a lot.”
Paul expects that the main areas that will be affected are food and vehicles, both of which have exerted deflationary or deflationary pressures in recent months. Small businesses near ports may also feel negative impacts, he added.
“If this continues for a week or two, you're going to find companies that are in real shortages, and they're definitely going to have to raise those prices just to prevent widespread shortages of those goods,” Paul said.
All of this comes at an inopportune time for the Fed. Last month, the central bank cut its benchmark borrowing rate by half a percentage point and indicated that further reduction would come as it gained confidence in declining inflation.
However, a strike can complicate the decision-making process. The October jobs report, the last report the Fed will see before its policy meeting scheduled for Nov. 6-7, will be affected by layoffs affected by the strike as well as those caused by Hurricane Helen.
This coincides with the imminent presidential elections on November 5, and the economy is a central issue.
“This is going to complicate absolutely everything the Fed is trying to do because they can't actually read how the economy is doing,” Jim Bianco, head of Bianco Research, told CNBC.
Federal Reserve Chairman Jerome Powell said Monday that he expects the central bank to cut interest rates by another half a percentage point by the end of the year, somewhat slower than markets had expected.
Correction: The International Longshoremen's Association has called for a halt at major eastern container and cargo ports. An earlier version misstated the organization's name.
