A port strike could reignite inflation, with the greater economic impact depending on how long it lasts

A strike affecting ports along the East Coast and Gulf Coast could boost prices for food, cars and a host of other consumer goods, but is expected to have only a modest broader impact — as long as it doesn't last too long.

Manufacturers of everything from trucks to toys to artificial Christmas trees are facing obstacles now that the International Longshoreman's Association has declared a shutdown at major container and cargo ports in the East.

From a macro perspective, the impact will depend on the duration. President Joe Biden, under the powers granted by the Taft-Hartley Act, could intervene and impose an 80-day cooling-off period that would at least temporarily halt the strike, although there is little indication he will do so.

That will leave hope in the hands of union negotiators and the US Maritime Alliance that the strike will not drag on and cause greater hardship for a US economy heading into the critical shipping holiday season.

“Labor actions against longshoremen along the East and Gulf coasts of the United States will deliver a modest blow to GDP,” said RSM chief economist Joseph Brusuelas, who estimated the weekly impact at just over 0.1 percentage point of gross domestic product and $4.3. billion in lost imports and exports.

“Given that the US economy is currently on a 3% growth path, we do not expect the strike to derail the trajectory of the domestic economy or pose a risk of an early and unnecessary end to the current economic expansion,” he added.

The $29 trillion US economy has avoided several landmines and has been in growth mode for the past two years. The Atlanta Federal Reserve expects third-quarter growth of 2.5%, boosted by an acceleration in net exports.

However, a prolonged work stoppage could threaten this.

Some of the key industries facing challenges include coal, energy and agricultural products. A rule of thumb is that for each strike day it takes almost a week for the ports to return to normal levels of operation.

“The costs of the strike would escalate over time as export and import backlogs increase,” Citigroup economist Andrew Hollenhorst said in a client note. “Perishable products such as imported fresh fruit could be the first to experience shortages. If the strike lasts more than a few days, shortages of certain manufacturing inputs could ultimately slow production and increase prices for industrial goods such as cars.”

However, there are potential buffers to the damage a strike can cause.

First, west coast ports are expected to take over some of the freight activity that would normally go to eastern ports. Additionally, some companies have anticipated the disruption and stocked up in advance.

In addition, pressure on supply chains, which has sharply worsened during the pandemic, has largely abated and is in fact below pre-Covid-19 levels, according to a measure from the New York Fed.

“We believe fears surrounding the potential economic fallout are overblown,” wrote Bradley Saunders, North American economist at Capital Economics. “Frequent shocks to supply chains in recent years have made manufacturers more aware of the risks of low inventories. It is therefore likely that companies will have taken precautions in the event of a strike – not least because the possibility has been touted by the ILA. for months.”

Saunders added that he thinks there is a strong possibility that the White House could join the fray and call for a cooling-off period, despite the administration's strongly pro-union views.

“There is little chance that the government would risk putting pressure on its recent economic successes less than two months before the election,” he said.

In the meantime, there are a whole host of other issues that can complicate matters.

Supply chain problems could worsen inflation just as price pressures appear to have cooled from peaking in mid-2022, pushing annual interest rates to their highest levels in more than four decades. The maritime association is proposing increases of almost 50%, another factor that could reignite inflation as wage pressures have also eased. The union is seeking larger increases plus guarantees against automation.

“This is clearly transitory. They will find a solution,” said Christopher Ball, an economics professor at Quinnipiac University. “That being said, in the short term, if it lasts more than a few days, if it lasts more than a week… that will certainly push up the prices of a lot of those goods and services now. It could cause prices to rise. short-term spikes during the strike, and I can easily see this driving up the prices of certain goods significantly.”

Ball expects the main areas to be affected will be food and vehicles, both of which have exerted both disinflationary and deflationary pressures in recent months. Small businesses near the ports could also be negatively impacted, he added.

“If it goes on for a week or two, you're going to run into companies that have real shortages and yes, they're absolutely going to have to raise those prices just to avoid major shortages of those goods,” Ball said.

This all comes at an inopportune time for the Federal Reserve. The central bank cut its key interest rate by half a percentage point last month and signaled that there will be further easing as it gains confidence that inflation will decline.

However, the strike may complicate decision-making. The October jobs report, the last the Fed will see before its Nov. 6-7 policy meeting, will be affected by layoffs from the strike as well as those from Hurricane Helene.

It coincides with the approaching presidential elections on November 5, and the economy as a central issue.

“This would completely complicate everything the Fed is trying to do because they won't get insight into what the economy is actually performing,” Jim Bianco, head of Bianco Research, told DailyExpertNews.

Fed Chairman Jerome Powell said Monday he expects the Fed to cut rates by another half a percentage point by the end of the year, slightly slower than markets expected.