Four or Five Grim Horsemen
How many can the economy withstand?
The strength of the US economy has been impressive – baffling but impressive – fed, as it is by the robust spending of people secure in jobs for which they are making more money and paid down heaps of debt with pandemic stimulus. The average savings and checking accounts are some 50% higher than pre-pandemic levels. Although, they are also 50% less that post-pandemic highs. Mark that shrinking money cushion.
While economic growth in both China and Europe are limping, the US has taken the Fed’s raising rates to 22-year highs in stride. So far, the economy has managed to ignore what was supposed to be one Horseman of the Recession. Well done us. The problem is those Four Horseman coming over the hill.
The First Horseman is Government Shutdown: The economy has learned to take these theatrical government shut downs in stride – but they do come at a cost. Given that some 800,000 employees face furlough, and a slowdown of government spending, this could shave up to a quarter percentage point off GDP. Unhelpful, true, but not enough for the wheels to really come off. Think of it as an accelerant, not a catalyst or explosive.
The Second Horseman is Student Debt: Next month student loans payments will resume, knocking about $100bn out of consumer’s pockets over the next year – or about $200-300 per month per person.
The Third Horseman is called Oil: Prices have ticked about the $90p/b mark again causing consumer inflation to rise for the last two months. Generally speaking, $100 p/b is the inflection point for the American consumer: when prices hit $110 last summer, it shaved 4.1% off domestic demand for gasoline. Both Russia and Saudi Arabia seem intent on keeping prices high, as rate hikes and student loan payments start to bite. And that money cushion is not what it was.
Think of these two as catalysts. If you are going to lob a bomb, economic or otherwise, a catalyst and an accelerant will only take you so far without an explosive.
Which brings us to the Fourth Horseman, the UAW strike. On September 15, some 13,000 UAW workers went on a strike that has cost manufacturers and workers $1.6 billion and halted production of 16,000 vehicles. Still, this thing will go longer than either UAW president Shawn Fain, or USA president Joe Biden have calculated. Fain doesn’t appear to even want to negotiate, but has opted to terrorize the Big Three with a trial by media and Facebook streams, where he is not only airing UAW demands but automakers counter-offers.
If the wheeze sounds familiar, it’s that much of Fain’s staff, assembled since taking power of the UAW, are from Bernie Sanders campaign teams. Which largely explains the use of emotional flatulence to mask a failure to grasp simple mathematics. Like a grandpa desperate to be hip, Biden is chasing said flatulence by joining the UAW strikers on Tuesday to show his support and announce to the world that he, literally, can’t put two and two together. He’s desperate to draw Union voters back from their Trump swing, but in doing so is shooting his own green industrial policy in the foot by running off investment in his vaunted fast EV transition and transferring that money away from EV build-outs to Union members are trying their best to drive up the costs of American EV that are already priced out of the market for most buyers. I trust you see the contradiction.
For their part, the American auto industries was brought to its knees in series bankruptcies in the Obama years that were largely due to high labor costs. The problem with the UAW strategy is that production halts don’t always mean loss of profits. Automakers and chip makers both made windfall profits when supply disruptions drove up prices. If you managed to stay awake in macroeconomics 101, you could make a solid argument that the opposite happens: Shrink inventories and prices go up, which leads to higher profits per unit. This drawn-out fight will lead to parts-suppliers and distribution center employees losing their jobs. And now we’re talking about real unemployment.
The knock-on here is that Fain is leading the UAW into total war with three companies that can afford to use to the higher profits on scarce cars selling at an immediate premium to last out the strike. that’s the short term. The long term is that, once again, the largest slice of America’s woeful manufacturing sector will once more but unprofitable from unsustainable labor costs. Which will translate into more unemployment.
Which give the Four Horseman of the Recession a catalyst, accelerant and explosive. We’d like to cushion ourselves from the blow, but that money cushion isn’t as fat as it once was.