STLA - Special Situations Report: UAW Strike Impact

2023-09-25 16:20:04 ET

Summary

• Union membership in the U.S. has slightly declined, but the actual number of unionized workers has increased.
• Labor strikes, particularly those led by the UAW, may have limited effects on overall inflation.
• The UAW's demands could affect the profitability and costs of businesses, particularly GM and Ford.

Unraveling the Impact: Labor Disputes and Economic Implications

The ongoing labor disputes have prompted investors to contemplate the potential implications of these demands on various facets of the economy, including inflation, business profitability, wage disparities, and labor market dynamics. In this report, we aim to provide a concise summary of our research findings in order to address these critical inquiries.

First, union membership in the U.S. has seen a slight decline in their union membership rate, dropping from 10.3% in 2021 to 10.1% in 2022, according to BLS data. However, the actual number of unionized workers increased by 273,000, reaching a total of 14.3 million in 2022. Notably, the public sector maintains a significantly higher union membership rate (33.1%) compared to the private sector (6.0%). In terms of actual numbers, approximately 7.1 million public-sector employees were union members in 2022, which was roughly equivalent to the 7.2 million union members in the private sector.

Regarding the potential impact of labor strikes on inflation, an argument suggests that such strikes, particularly those led by the UAW, may have limited effects on overall inflation. This perspective is supported by several factors: the declining influence of unions over time, the relatively small share of unionized private sector workers, and the analysis that labor-cost growth has only a minimal impact on inflation, contributing about 0.1 percentage point to recent core PCE inflation according to the San Francisco Fed. This result suggests that even if the UAW were to secure 9% annual increases, the impact on inflation as a whole would be minimal.

Research by the San Francisco Fed indicates that increased labor costs do result in higher prices for non-housing services, but their influence on overall inflation is relatively minimal. Labor-cost growth does not significantly affect the inflation rates of goods or housing services.

This assessment suggests that the recent upswing in the employment cost index explains merely 0.1 percentage points of the current elevated inflation levels, which represents a negligible fraction of the 3 percentage point increase in the core PCE measure. Moreover, this analysis indicates that changes in labor costs primarily influence prices through the supply side, as businesses tend to raise prices in response to increased costs rather than due to heightened demand.

These findings challenge the narrative that labor-cost growth alone serves as a significant driver of NHS price inflation, leaving room for alternative explanations for the observed strong correlation between labor-cost growth and inflation. Recent evidence also points to the fact that wage growth tends to follow inflation trends and expectations of future inflation, further complicating the relationship. In summary, this research underscores that recent labor-cost growth may not be an effective indicator of inflation risks in the current economic landscape.

Businesses, especially General Motors (GM) and Ford (F), face scrutiny due to the UAW's demands, which could affect profitability and costs. Assuming a 30% increase in labor costs over four years, these automakers may experience a 1% contraction in profit margins by our estimates. However, the impact on other U.S. firms is expected to be less significant. Wells Fargo estimates that GM's current proposal could cost between $700 million and $1.2 billion while meeting all of the union's demands might cost $6 billion to $8 billion.

The current situation presents a complex landscape in which economic, political, and market dynamics intersect. The impending threat to both the economy and political pressure, coupled with potential market share loss to Tesla (TSLA) due to delays, may incline auto companies to take a more favorable stance towards the UAW's demands. UAW leaders are expressing concerns about potential layoffs and plant closures as automakers gradually transition their production to electric vehicles, prompting the union to actively seek representation in emerging EV assembly plants and battery factories across the nation. However, it is essential to consider the potential economic ramifications of a prolonged strike. While the immediate impact of an autoworkers' strike may be limited, it has the potential to significantly affect the country's GDP growth if it broadens and endures. According to Pantheon Macroeconomics, a full-fledged strike involving the 146,000 union members at Ford, GM, and Stellantis (STLA) could result in a substantial 1.7 percentage point quarterly hit to GDP. This concern arises at a time when economists are already expressing concerns about the possibility of the U.S. entering a recession in the coming months. Auto production contributes to around 2.9% of GDP.

As for the return of individuals who left the workforce due to COVID-19, there is currently no data indicating a significant resurgence in unretirement rates as seen in 2022. In fact, indicators such as Non-Farm Payrolls have not only rebounded but have surpassed pre-pandemic levels, and unemployment rates are at recent historic lows. This result implies that the current state of the labor market differs from that of 2022, when there was an increase in the unretirement rate and a surge of retirees reentered the workforce.

- Gowshihan Sriharan, CFA "The Rover."

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