The Potential Impacts of the Port Strike

Background:

Across three dozen ports stretching from Maine all the way to Texas, about 45,000 dock workers (and counting) from The International Longshoreman's Association (ILA) have begun their first walkout strike in almost 50 years.

The reason for the strike comes from a desire for higher wages, as these situations often do. Workers are concerned over a growing fear of being replaced or outsourced by automation, as well as frustrations over their income not keeping pace with rising prices over the last few years, with their most recent pay increase being $1 while workers on the west coast received higher compensation.

The union's president Harold Dagget has recently come out and stated that "I will cripple you and you have no idea what that means," referring to the U.S. economy. "They don't care," he kept repeating, "It's not fair, and if we don't put our foot down now, they would like to run all over us and we're not gonna allow that," he said, demanding that "Washington...put so much pressure" on port authorities that they will cave to union demands. "Cars won't come in, food won't come in, clothing won't come in. You know how many people depend on our jobs? Half the world."

The workers want a $5 per year raise over the next 6 years, bringing their average pay to $69 per hour by the end of the potential new contract. This is very unlikely to happen, but a halfway point between their previous $1 raise to their currently demanded $5 raise per year seems the most reasonable case for both sides, all things considered. 

The implications and potential impacts that the strike could have are vast, and could cause a lot of problems both economically and politically. Some are expecting it to go on for weeks, even potentially leading into the presidential election next month.

Political Implications:

An idea has been floating around that the Biden administration could come in and prevent the ILA strike from doing too much damage by invoking the Taft-Hartley Act of 1947, which created certain restrictions around labor unions (among other things), but more importantly (in this case) it gives the president the power to prevent or end a strike per an executive order and force union workers back to their jobs. This has been done before by George W. Bush in 2001, ending an 11-day shutdown of 29 west coast ports and declared the move was "vital to the economy and military" especially during an uncertain time. Later that year, the U.S. walked straight into a recession, so it turned out to be the right call by Bush, as a prolonged strike at that time could've made a bad situation even worse. As a side note, it's interesting how history rhymes, as people nowadays are just as concerned about an incoming recession and here we go with another port strike.

Now, the Taft-Hartley Act is rarely used, once by Nixon in the 70s and by Bush in 2001, the difference is that the current administration is of the Democratic party, which unions *historically* have leaned, but that's now changing as it's starting to become more evenly split over the last couple of years (for obvious reasons).

So, what does that potentially mean? It means that the Biden administration may not move to end this port strike. Think about it, ending the strike could piss a lot of people off, people who are already pissed about inflation, meaning they could lose their favorability in this voter base. Heading into an election that is a little over a month away, I'm not sure that's a risk they're willing to take as they're losing their grip more and more every day in what could be - a close election. But on the flip side, the economy could suffer, making things worse for everyone and not just the union workers. The current administration says they have no plans to enact this, but they could flip flop if things get really bad but only time will tell.

Economic Implications:

Local Economies:

When a strike begins, worker pay typically stops. In some regions of the U.S., there are laws and regulations in place that will force union workers to receive unemployment. But in this case, those mostly fall into west coast unions and not the east coast, meaning that the workers who are currently on strike will not be forced to do that. So, not only would you have the work stoppage effecting the broader economy, but the velocity of their own money affecting their own local economies. If you have hundreds, if not thousands of people not spending money, or at least slowing down their spending, local restaurants, retail stores, etc. as a result will be affected and perhaps get hit a little harder by this.

Industry Effect:

Now, about 50% of all U.S. imports and exports by sea will be affected. JP Morgan estimates that as much as $5 billion per day may be affected, whereas others fall in the range of about $1 billion. Margins in the shipping industry have already hit hard, not only thanks to a slowing economy, but also from the Houthi strikes in the Red Sea making it much more dangerous to ship goods in that region and making it more expensive as a result.

The first thing that may happen is we may see air cargo rates spike (which they've already nearly tripled in some sub-sectors of the industry over the last year). Part of which again has to do with the attacks in the Red Sea (causing shipping by sea to become more expensive and dangerous, thus resulting in more air cargo). This has also caused container prices to push higher, going from an average of $1,900 per container to $4,000 and at its peak - about $5,800. The port strike may have a similar effect on this, i.e. it'll be more expensive to get a container unloaded in a port that's operational, on top of the fact that it already may have to be rerouted to another port, using fuel that's already expensive and so on and so forth. Not only would you have shipments by sea becoming more expensive, but also air cargo due to an increased demand for that type of shipment. 

Broader Economy:

With that being said, it's important to look at the potential effects this could have on inflation. Many people believe that this could end up igniting a second wave. While that is a valid concern, I don't believe it will come by the way of consumer prices (CPI), and it'll more so effect PPI. Here's my logic: companies over the last year have been drastically losing their pricing power. The consumer is tapped, and most companies likely won't be able to pass on higher prices to the consumer because they can barely afford them (or can't) already, leaving a very limited amount of wiggle room. But somebody has to pay the bill. It won't be shipping and cargo because they're the ones charging that bill. Instead, it will likely be the businesses that'll have to eat it via their margins, e.g. food companies, electronics, apparel, materials, autos, etc. We may see PPI rise, but I don't think we'll see CPI rise as much as people think.

Another thing to note as well is that companies have also started preparing for a scenario such as this, as we've seen inventory levels start to rise more so over the last few months, which gives them more of a cushion and ability to weather the storm so to speak.

Final Thoughts:

The question that remains is, what if this goes on for an extended period of time? It's possible that a 2-ish week shutdown doesn't have any serious effect on the broader economy. A prolonged strike however, especially one that lasts through the election, will likely have a much harder impact on GDP because this would have an effect going straight into the holiday season. Retailers specifically would get screwed here, e.g. department stores, e-commerce, car dealerships, etc.

Given the Biden administration's previously expressed unwillingness to get involved with this, which would risk losing the union vote, the likelihood of this going on for a longer period of time is definitely more likely. On top of that, you have union's president practically directly calling out Washington, clearly has no issues with the potential turmoil this could cause and seems very willing to hold out until he and his union gets what they want. The one thing that we can say for certain is that the longer this goes on, the more damage it will cause, and potentially lead to some sort of black swan type of scenario.