'Triple threat': Auto strike joins a messy season for Biden's economy

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The strike against Detroit's Big Three automakers is hitting the U.S. economy at a precarious time — as it's struggling with an era of high inflation and soaring borrowing costs.

Combined with other emerging headwinds — rising gas prices, tightening credit, the resumption of student loan payments and shrinking household savings — the walkout could slow growth just as President Joe Biden and Federal Reserve Chair Jerome Powell are trying to steer the U.S. away from a recession.

Gregory Daco, chief economist at EY-Parthenon, said student loan payments, a government shutdown and the auto strike represent a "triple threat" that could shave more than three-quarters of a percentage point off growth in the fourth quarter. Wells Fargo analysts said higher interest rates and large fiscal deficits were among a “mosaic” of threats that raise the odds of a recession in the coming months.

"None of these is a shot in the temple; they’re nonfatal,” Federal Financial Analytics managing partner Karen Petrou said. “But none is good, and the American public is fragile. It doesn't take much to throw them off.”

Pillars of the economy — including the job market and consumer spending — remain strong. But a protracted auto industry strike could be a significant test for Powell, who is already under pressure from progressives to relax monetary policy as inflation levels out in key segments of the economy.

Car prices were a big reason why inflation climbed as the U.S. emerged from the pandemic in 2021 and 2022. Fed policymakers say a UAW strike is a danger to supply chains that only recently recovered from Covid-era bottlenecks.

A lengthy strike “probably would be inflationary,” James Bullard, who led the Federal Reserve Bank of St. Louis until this summer, told POLITICO on Thursday. “The car market has been disrupted by the pandemic and has not really returned to normal.”

Auto inventories are still well below where they were before Covid-19 sent manufacturing into a free fall in early 2020. Demand for both new and used cars has been strong, but the revival of supply chains — particularly for highly sought microchips — has allowed production to recover. Price growth is starting to slow, but it has taken much longer for disinflation to set in than some policymakers had anticipated.

Moody’s Investor Service estimates that as many as 870,000 fewer autos would roll off assembly lines if every Ford, General Motors and Stellantis plant is shut down by a six-week strike (That duration reflects UAW’s 40-day strike at General Motors in 2019). New vehicle inventories cracked 2 million for the first time since 2021 at the end of August, industry research firm Cox Automotive reported earlier this week.

UAW President Shawn Fain said the union’s strategy will feature strikes at a limited number of strategically selected plants to “keep the companies guessing.”

The longer the impasse, the more plants would be affected, and some market observers — including Bank of America’s lead U.S. auto analyst John Murphy — have speculated that the ensuing chaos might give the Big Three automakers reason to proactively shut down their plants and restart them only when both sides reach an agreement.

“It’s tough to measure these things. There’s a lot of uncertainty around how that would play out,” said Gabriel Ehrlich, director of the University of Michigan’s Research Seminar in Quantitative Economics.

For the economy, the consequences of a long, industrywide strike would be akin to a leaky brake line: It might not be noticeable early on, but the longer you wait to fix it, the harder you have to work to slow down.

Goldman Sachs economists estimate a 10th of a percentage point could be shaved off quarterly annualized GDP growth for each week the strike persists. That would rebound once production resumed.

But if prices spike, it might take longer for inflation in the auto market to recover, “particularly since the resolution of the strike will presumably involve some increase in auto labor costs under whatever agreement they come to,” Goldman’s Chief U.S. Political Economist Alec Phillips told POLITICO.

A longer strike could have lasting financial effects on the Big Three’s suppliers, which might lead to layoffs, Ehrlich said. Rene Lipsch of Moody’s said many of the industry’s suppliers are financed with floating rate debt that became more expensive to pay down as the Fed raised rates to stamp out inflation.

“Spillovers will start out limited, or modest,” Ehrlich said. “If a strike went on longer than six weeks, we would expect those spillovers to be thicker.”

The thicker the spill, the harder it is for Biden. The UAW is a powerful political force in Michigan, where the president’s reelection campaign has pushed “Bidenomics” and a resilient labor market into the foreground of his messaging.

The campaign ran an ad that touted falling inflation and a historically low unemployment rate during the NFL’s opening game — where the Detroit Lions surprised the Kansas City Chiefs — last week.

Biden and his Democratic allies have struggled to convince voters of the economy’s strengths, however. Even as prices fell and wage growth started to outpace inflation, voters continued to give the president dismal marks, putting his reelection at risk.

And some of the challenges facing consumers could cause the economic outlook to weaken still.

The New York Fed reported that optimism is fadingamong U.S. households when it comes to personal finances, particularly among those without a college degree. Excess savings accrued during the pandemic have fallen by nearly $2 trillion, according to San Francisco Fed estimates.

And while products are still flying off the shelves at retailers, there’s evidence that higher gas prices — which are volatile but play an outsize role in how people view their financial health — has chipped away at discretionary spending, EY-Parthenon Senior Economist Lydia Boussour said in a research note.

For the economy, those are all “minor headwinds,” said David Kelly, the chief global strategist and head of global market insights at J.P Morgan Asset Management. Taken together, they’ve “put a bit of pressure on consumers, particularly as they have gone through all the money that they'd saved during the pandemic.”

“It's been a good year for consumers hanging in there. But I think it's going to be tougher as we go into the fourth quarter,” he added.