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Markets


EVEN BRIEF UAW STRIKE SEEN CAUSING BILLIONS IN US ECONOMIC DAMAGE

 * A 10-day work stoppage would reduce US GDP by $5.6 billion
 * Strike would push Michigan into a recession: Anderson

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Ford Gives UAW Workers a Raise Ahead of Strike Deadline
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Ford Gives UAW Workers a Raise Ahead of Strike Deadline
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By David Welch and Michael Sasso
September 10, 2023 at 8:00 PM GMT+1

Just when US automakers and the broader economy were shaking off the effects of
the pandemic and semiconductor shortages, a long strike by the United Auto
Workers union could bring higher inflation and economic damage.

A strike against General Motors Co., Ford Motor Co. and Stellantis NV of just 10
days would reduce US gross domestic product by $5.6 billion and likely push the
Michigan economy into a recession, according to Anderson Economic Group, an
economic consultancy based in Lansing, Mich. It could also make some car models
scarce and push prices up after they started coming down from record levels.

If UAW President Shawn Fain makes good on threats to strike all three companies
on Thursday, it would have far-reaching effects. A long walkout would hit
suppliers and their workers and soften prices of key commodities, especially
steel. Damage to the economies in Michigan, Ohio and Wisconsin could make swing
states a tougher sell in the 2024 election for President Joe Biden.



“If we were to have a long strike in 2023, the state of Michigan and parts of
the Midwest would go into a recession,” said Patrick Anderson, chief executive
officer of Anderson Economic, which counts GM and Ford among its clients. “When
GM workers went on strike in 2019, you saw gross state product drop in Michigan
in the fourth quarter, while in the rest of the country it was largely
unaffected. That won’t be the case this time if the UAW goes through on its
threat to strike all three companies.”



The Biden administration is on edge about the strike. The auto industry accounts
for about 3% of US GDP but plays a much bigger role in the Great Lakes
economies, and Democrats will rely on winning Michigan and Wisconsin to retain
the White House. The President has tapped Gene Sperling, former economic adviser
to Presidents Barack Obama and Bill Clinton and a Michigan native, to act as a
liaison between the automakers and the union.

Expand

Shawn Fain, president of the United Auto Workers (UAW), center, marches with UAW
members during a Labor Day parade in Detroit, Michigan, on Sept. 4.Photographer:
Jeff Kowalsky/Bloomberg

Michigan Gov. Gretchen Whitmer told Bloomberg News in an interview last week
that she is concerned about where the negotiations are headed. She is talking to
leaders of each company and the union to try and head off a strike, but added
that it is “unclear” what more she and her state can do.

Of the $5.6 billion in economic impact, lost worker pay would come to $859
million and lost automaker earnings would be $989 million, Anderson said. The
rest would come from layoffs and lost business at parts makers and other
industries that rely on the three automakers.

Fain has demanded a defined-benefit pension and retiree health care, which went
away in 2007 for new hires as the industry was headed into a crisis. He also
opened talks with a request for pay raises equal to 46% over four years, a
32-hour work week and reinstatement of cost-of-living allowances. And he wants
to end tiers of pay that give more tenured workers better compensation.

Automakers estimate that granting Fain’s entire wish list would drive up costs
by $80 billion over four years, with most of that coming from pension costs and
retiree health care.



GM offered a 16% raise and none of the retiree benefits Fain demanded. Ford made
a similar proposal before that and both were rejected. Stellantis offered a
14.5% pay raise to “most” union employees, and it was turned away.



If the workers wind up seeing strong wage gains, with or without a strike, it
will push up labor costs nationwide after a summer of impressive pay gains won
by Teamsters at United Parcel Service Inc. and pilots at American Airlines Group
Inc. Higher pay could also result from the ongoing strikes by Hollywood actors
and writers.


WAGES AND INFLATION

The Federal Reserve factors rising wages into its battle against inflation,
which has spurred the central bank to raise interest rates 11 times since early
2022. US average hourly earnings rose 4.3% last month from a year earlier.
That’s down from their 5.9% peak last year but still high historically. The Fed
has been trying to push inflation, currently 3.3% in July, back to its long-term
target of 2%.

“At least in sectors where workers are scarce, average pay rises of 5%+ annually
are to be spread over a number of years - meaning labor costs will continue to
rise at rates above those consistent with 2% inflation for some years to come,”
economists at Citigroup said in a note this week.

Read More: What’s at Stake as US Auto Workers Threaten to Strike: QuickTake

A strike also would certainly ripple its way through the auto industry’s parts
network. When GM workers went on strike for six weeks in 2019, American Axle &
Manufacturing Holdings said its fourth-quarter earnings fell 25% to $194 million
in earnings before interest, taxes depreciation and amortization based on the
walkout alone.



American Axle is heavily reliant on GM, but get as much as 65% of its revenue
from domestic automakers. Seat maker Lear Corp. and Canadian parts maker Magna
International Inc. both get at least 30% of revenue from the three automakers as
well, said Barclays analyst Dan Levy, in a research note.


HIT TO STEEL

A UAW strike would be a major blow to steel producers, at least in the short
term. During the 2019 GM strike, prices for hot-rolled steel fell 17% to $500 a
ton over the six-week period. Prices did rebound by the end of the year,
according to Bloomberg Intelligence researchBloomberg Terminal. A new UAW strike
against one of the Big Three automakers might spur a similar 17% drop in steel
prices to around $670 a ton, while a strike against multiple automakers would
prompt a quicker decline, said Richard Bourke, a senior analyst who follows
basic materials for BI.

Meantime, steel production might slip by 76,000 to 98,000 tons a month, assuming
one ton of steel per vehicle, and depending on which automaker were targeted,
Bourke said.



There’s about 1 ton of steel per car produced in the U.S. If the strike were to
last for an extended period of time — for about 3 or 4 months — researcher CRU
Group warns that this may force the idling of some steel mill production. Most
of the 90,000 tons of steel would hit the spot market, which Wolfe Research said
would likely be snapped up by other automakers who aren’t experiencing a labor
stoppage. The impact of a prolonged strike to the steel industry would also push
up price in the first half of 2024 — due to supply cuts from idling steel
plants.


SUPPLY ON HAND

If the strike ends quickly, the automakers will suffer minimal harm, said
Charlie Chesbrough, senior economist at Cox Automotive. Automakers have a solid
supply of vehicles with about 58 days’ worth of inventory. All three companies
have strong supply of full-size pickup trucks, their biggest moneymakers.



The Ram 1500 has a 107 days’ supply, followed by the Ford F-150 at 98 days’
supply. GM has about 80 days’ worth of Chevrolet Silverado and GMC Sierra
trucks, Cox said.

“I don’t know that a couple weeks would have noticeable impact in the
marketplace,” Chesbrough said in an interview. “If it goes on for a couple
months, we’ll be back to where we were in 2021 with semiconductor-related
shortages.”

Ultimately, some of the economic damage from labor strikes can be recovered.
Anderson said the bigger risk is that automakers agree to some of Fain’s more
expensive demands, like a return to guaranteed pensions and retiree health care,
both of which played a role in the 2009 bankruptcy filing by GM and the former
Chrysler LLC, which is now part of Stellantis.

If automakers take on too many costs, they will become uncompetitive, he said.
Other unions may make similar demands. The Teamsters won a $30 billion contract
from UPS that will eventually pay drivers $49 an hour, compared to an
autoworkers’ top hourly wage of $32. UPS later raised average prices 6.9% this
year and plans to increase them another 5.9% in December.

If the UAW settles for better wages, the new contract shouldn’t impact inflation
much, said Chris Low, chief economist at FHN Financial. Autoworkers were locked
into contracts they signed before the pandemic, so missed out on the big wage
gains others saw in the last couple years.

“I don’t think they see this as an alarm bell for inflation” Low said, speaking
of the Federal Reserve. Still, “if there is a prolonged strike, it’s going to
have some effect on growth.”



— With assistance by Joe Deaux and Thomas Black

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