The port strike might stoke inflation once more, with bigger financial impacts relying on how lengthy it lasts

Longshoremen at the Port of Miami strike near the port entrance demanding a new labor contract on October 1, 2024 in Miami, Florida.

Giorgio Viera | Afp | Getty Images

A strike at ports along the East and Gulf Coasts could drive up prices for food, automobiles and a variety of other consumer goods, but is expected to have only modest broader effects — as long as it doesn't drag on for too long.

Manufacturers of everything from trucks to toys to artificial Christmas trees are facing obstacles after the International Longshoremen's Association ordered a halt to major container and cargo ports in the East.

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

That will leave union and US Maritime Alliance negotiators hopeful that the strike doesn't drag on and cause more distress to the U.S. economy ahead of the critical holiday shipping season.

“Labour actions by longshoremen along the East and Gulf Coasts of the United States will have a small impact on GDP,” said RSM chief economist Joseph Brusuelas, who put the weekly impact at just over 0.1 percentage point of gross domestic product, at $4.3 billion. Dollars in lost imports and exports.

“Given that the American economy is currently on a growth path of 3%, we do not expect that the strike will harm the development of the domestic economy or pose a risk of a premature and unnecessary end to the current economic expansion,” he added.

In fact, the $29 trillion U.S. economy has dodged several landmines and has been in growth mode for two years. The Atlanta Federal Reserve expects third-quarter growth of 2.5%, driven by an acceleration in net exports.

However, a longer break from work could jeopardize this.

Affected areas

Key industries facing challenges include coal, energy and agricultural products. As a rule of thumb, it takes almost a week on each day of the strike for the ports to return to normal functioning.

“The costs of the strike would increase over time as export and import backlogs increase,” Citigroup economist Andrew Hollenhorst said in a note to clients. “Perishable products such as imported fresh fruit could be the first to become scarce. If the strike lasts longer than a few days, the shortage of certain inputs could ultimately slow production and drive up prices for manufactured goods such as cars.”

However, there are potential buffers for the damage a strike could cause.

For one thing, West Coast ports are expected to take on some of the freight business that would normally go to Eastern ports. In addition, some companies had expected the standstill and had already built up inventories in advance.

In addition, the pressure on supply chains, which increased sharply during the pandemic, has largely eased and is actually below pre-corona levels, according to a measurement by the New York Fed.

“We believe fears about the potential economic impact are overblown,” wrote Bradley Saunders, North America economist at Capital Economics. “Frequent supply chain shocks in recent years have made manufacturers more prepared for the risks of running out of inventories. Therefore, it is likely that companies have taken precautions in the event of a strike – not least because the ILA has been touting the possibility for months.”

Saunders added that he believes there is a strong possibility that the White House could intervene in the fight and demand a cooling-off period, despite the administration's strong pro-union stance.

“There is little chance the government will risk jeopardizing its recent economic successes less than two months before a closely contested election,” he said.

Risk of inflation

Meanwhile, there are a number of other issues that could complicate matters.

Supply chain bottlenecks could exacerbate inflation, while price pressures appear to have eased from their peak in mid-2022, which pushed the annual rate to its highest level in more than 40 years. The shipping association is proposing wage increases of nearly 50%, another factor that could boost inflation again as wage pressures have also eased. The union is demanding larger increases and guarantees against automation.

“This is clearly temporary in nature. 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, it will certainly drive up the prices of many of these goods and services. This could lead to price increases.” There are short-term spikes during the strike and I can easily see prices for certain goods being pushed up significantly.

Ball expects the food and vehicle sectors to be hardest hit, both of which have exerted either disinflationary or deflationary pressures in recent months. Small businesses near the ports could also feel negative impacts, he added.

“If it takes a week or two, you're going to run into companies that have real shortages, and yes, they absolutely need to raise those prices just to prevent widespread shortages of those goods,” Ball said.

This all comes at a bad time for the Federal Reserve. Last month, the central bank cut its key interest rate by half a percentage point and indicated that further rate cuts would follow as it is confident that inflation is easing.

However, the strike could complicate decision-making. October's jobs report, the last the Fed will see before its policy meeting on November 6-7, will be affected by both strike-related layoffs and Hurricane Helene layoffs.

It coincides with the upcoming presidential election on November 5th and the economy is a key issue.

“This would completely complicate everything the Fed is trying to do because it gives them no insight into what the economy is actually doing,” Jim Bianco, head of Bianco Research, told CNBC.

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

Correction: The International Longshoremen's Association has ordered a halt at major container and cargo ports in the East. A previous version misstated the organization name.

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