Docks
On October 1, 2024, dockworkers from the International Longshoremen’s Association (ILA) initiated a strike at major East and Gulf Coast ports across the U.S. from Maine to Texas, disrupting more than half of the country's import and export volumes. The ILA represents 45,000 dockworkers, who demand a 77% wage increase over six years, far above the 50% offer proposed by port employers. The strike, five weeks ahead of the U.S. presidential election, impacts key imports such as food, vehicles, and construction materials. Major retailers like IKEA and Home Depot, which anticipated disruptions, have rerouted goods and advanced their supply schedules to mitigate immediate effects. However, prolonged walkouts could lead to increased shipping costs, freight rate hikes, and potential product shortages. Despite early preventative measures, some wholesalers have begun raising prices to offset rising transportation costs. The Biden administration is under pressure to resolve the situation swiftly.
Historical Events of Work Stoppages in U.S. Commerce:
1. Pullman Strike (1894):
The Pullman Strike was a nationwide railroad strike in the U.S. that disrupted rail traffic, especially concerning freight and passenger trains west of Chicago. The strike, which stemmed from wage cuts and high rents in company towns, severely impacted the transportation of goods across the country, halting significant commerce. The federal government, under President Cleveland, intervened by deploying troops, leading to violent clashes and long-lasting disruption.
2. West Coast Dockworkers Strike (2002):
The lockout of dockworkers on the West Coast in 2002 lasted for 10 days and disrupted over $15 billion in trade. Ports were closed along the West Coast, causing significant delays in the shipment of agricultural products, machinery, and consumer goods. The shutdown led to widespread shortages in many industries, including retail and manufacturing, and resulted in government intervention to restart port operations.
3. UPS Workers Strike (1997):
The 1997 UPS workers strike lasted 15 days and involved over 185,000 workers. This nationwide strike disrupted the flow of approximately 80% of the nation’s small package deliveries. UPS's failure to deliver goods impacted businesses across sectors, leading to financial losses and delayed supplies. The strike underscored the importance of logistics in modern commerce and resulted in wage increases and improved working conditions for UPS employees.
Inflationary Impact of Wage Increases on U.S. Workers and Retirees:
A significant increase in wages, as demanded by the dockworkers in this case, has the potential to create inflationary pressures across multiple sectors. If the wage demand of a 77% increase over six years were met, it would likely lead to a cascading effect in industries reliant on labor-intensive operations, such as transportation, manufacturing, and retail. Businesses would face higher labor costs, and will pass these costs onto consumers through increased prices for goods and services. As supply chains tighten and transportation costs rise due to wage-related disputes, the overall cost of living could increase, leading to broader inflationary trends across the economy.
For retirees, who often live on fixed incomes and depend on savings or social security, such inflationary pressures would pose significant financial challenges. Since many retirees' benefits are not directly tied to inflation, they may face eroding purchasing power as prices rise faster than cost-of-living adjustments (COLAs) can compensate. For example, increases in prices for essential items such as food, housing, and healthcare would disproportionately impact retirees, especially those without substantial retirement savings or other income sources.
Additionally, while some retirees may benefit from inflation-linked pensions or social security adjustments, these mechanisms typically lag behind real-time inflation. In such an environment, retirees would need to make difficult decisions about budgeting and could experience a reduced standard of living. In contrast, wage earners, particularly in high-demand sectors, may see their incomes rise, providing some protection against inflation. This disparity between retirees on fixed incomes and active workers would exacerbate income inequality and financial stress among the retired population.
Thus, while wage increases may provide immediate benefits to active workers, they carry long-term risks for the economy by contributing to inflation, with retirees being among the most vulnerable to its negative effects.
Me Too
The concept of a "me too" employee mentality arises when workers across various industries begin to demand wage increases following the success of wage negotiations in another sector. This phenomenon can create a ripple effect where industries unrelated to the initial wage hikes also begin to experience upward pressure on wages, contributing to broad-based wage inflation. In the current economic environment, where inflationary pressures are already a concern, a widespread increase in wages could have significant consequences on the Federal Reserve’s monetary policy, particularly regarding interest rates.
Widespread Wage Increases and the Federal Reserve’s Response
The Federal Reserve (Fed) closely monitors wage growth as an indicator of inflationary pressures. While wage increases are generally viewed as positive for workers and the economy, they can contribute to inflation if they become widespread and outpace productivity growth. In such scenarios, businesses are forced to raise prices to cover their increased labor costs, leading to inflationary pressures throughout the economy. The Fed’s primary tool to combat inflation is raising interest rates, which cools down economic activity by making borrowing more expensive for consumers and businesses.
In recent months, the Fed has signaled that it may begin lowering interest rates in response to signs of economic slowdown or stabilization of inflation, which it did recently. However, if wage increases become dramatic on a widespread basis due to a "me too" mentality, the Fed could be forced to reconsider this position. Instead of lowering interest rates, the Fed may have to maintain or increase interest rates to prevent inflation from spiraling out of control. This is particularly true if wage growth leads to higher consumer spending, which, without a corresponding increase in the supply of goods and services, could push prices higher and sustain inflationary pressures.
Wage Growth, Inflation, and the Broader Economy
Widespread wage increases can have a significant impact on inflation, especially in an economy where supply chains are already strained. When wages rise, workers have more disposable income, leading to increased demand for goods and services. However, if businesses are unable to meet this increased demand due to supply constraints, they may raise prices, further contributing to inflation. Additionally, businesses facing higher labor costs will these costs on to consumers in the form of higher prices, further fueling inflationary pressures.
Inflation that is driven by wage increases can be particularly concerning because it creates a feedback loop. As prices rise, workers demand higher wages to keep up with the cost of living, and businesses, in turn, raise prices to cover their increased labor costs. This cycle, often referred to as a wage-price spiral, can be difficult to break without intervention from the Fed. Historically, when wage-price spirals have occurred, central banks have responded by raising interest rates to slow down economic activity and bring inflation under control. In such cases, wage growth is tempered, but so is economic growth, which can lead to higher unemployment and reduced business investment.
Impact on Commercial Loans and the Real Estate Market
One of the most significant consequences of a potential wage-driven inflationary spike is the effect it can have on commercial loans, particularly in the commercial real estate sector. Commercial real estate is highly sensitive to interest rates because many developers and property owners rely on financing to purchase, develop, or refinance properties. When interest rates are low, borrowing is cheaper, making it easier for businesses to finance projects and expand operations.
However, if the Fed is forced to maintain or raise interest rates to combat inflation, it will make refinancing existing commercial loans more expensive. Many commercial real estate loans are structured with short-term maturities, meaning that borrowers need to refinance their loans regularly. If interest rates are significantly higher at the time of refinancing, property owners may struggle to meet their debt obligations, especially if rental income or property values have not kept pace with inflation or rising interest costs.
This creates a precarious situation for the commercial real estate market. Higher refinancing costs can lead to defaults on loans, particularly for highly leveraged property owners. Defaults in the commercial real estate market can have a cascading effect, potentially leading to bankruptcies in other sectors of the economy. For instance, a significant default in commercial real estate could hurt lenders, particularly regional banks that are heavily exposed to commercial real estate loans. These banks may reduce their lending activity, tightening credit conditions for small businesses and consumers, which could further slow down economic growth.
Additionally, commercial real estate is often a bellwether for broader economic conditions. A downturn in the commercial real estate market can lead to reduced construction activity, job losses in the construction and real estate sectors, and a decline in property values, which can further exacerbate economic downturns. This scenario could create a vicious cycle where higher interest rates lead to a slowdown in economic activity, reduced consumer spending, and further pressure on businesses to cut costs, including through layoffs or reduced investment.
The Indirect Relationship and Prolonged Negative Impact
The relationship between widespread wage increases, inflation, and the commercial real estate market may seem indirect, but it can have far-reaching consequences. A significant increase in wages across multiple industries can lead to inflationary pressures that force the Fed to raise interest rates. Higher interest rates make refinancing commercial loans more expensive, which can lead to defaults and bankruptcies in the commercial real estate market. This, in turn, can have a cascading effect on other sectors of the economy, including banking, construction, and retail.
The prolonged negative impact of such a scenario can be severe. As businesses in the commercial real estate sector struggle to meet their debt obligations, bankruptcies can increase, leading to job losses and reduced economic activity. A slowdown in the real estate market can also hurt consumer confidence, further reducing spending and investment. In this environment, the Fed may find it difficult to lower interest rates without risking a resurgence of inflation, leading to a prolonged period of economic stagnation.
While wage increases are generally beneficial for workers, a widespread and dramatic spike in wages could lead to significant inflationary pressures that force the Federal Reserve to maintain or raise interest rates. This, in turn, could create challenges for commercial real estate and other sectors of the economy, potentially triggering a cascading effect of bankruptcies and economic slowdown. The indirect relationship between wage growth, inflation, and commercial real estate highlights the complexity of managing an economy in a period of inflationary pressures.
Reshoring Manufacturing
Dramatically increased wages in the U.S. could pose significant challenges to the country’s emerging reshoring efforts in manufacturing, especially when compared to China’s labor market. As U.S. wages rise, domestic manufacturing firms face higher labor costs, which could undermine efforts to compete globally. In contrast, China has maintained artificially low wages through government subsidies and labor market controls for decades, making its manufacturing sector highly cost-competitive. Despite China’s ongoing economic challenges, including unemployment, its manufacturing sector benefits from a vast labor pool willing to work at suppressed wages.
For U.S. manufacturers, the resurgence of domestic production has been encouraged by supply chain disruptions, geopolitical tensions, and national security concerns. However, rising wages, especially if they spike dramatically across industries, could diminish the cost advantages of reshoring. This makes it harder for U.S. manufacturers to compete with Chinese firms that continue to benefit from low-cost labor, despite China's economic hurdles.
Furthermore, increased labor costs may force U.S. companies to invest more in automation and technology to offset higher wages. While this could lead to productivity gains, it might slow job creation in the sector, posing a dilemma for policymakers looking to balance wage growth with sustainable manufacturing expansion.
And What About
As wages rise across industries, businesses will increasingly seek ways to improve efficiency and productivity to offset higher labor costs. One key strategy will be to invest in technology and automation, which will drive up the demand for highly skilled programmers to develop software that enhances operational workflows and productivity. These programmers will be essential in creating sophisticated systems to streamline processes, reduce human error, and maximize output per employee.
A simple yet impactful example of productivity improvement through standardization is the use of pallets in logistics. this is a simple example that should give one an aha moment.
The uniformity of pallets—standardized platforms used for transporting goods— revolutionized supply chains by enabling efficient loading, unloading, and movement of products with minimal hands-on labor. Pallets, when paired with forklifts and conveyor systems, dramatically reduce the time and workforce needed for material handling, thus improving throughput.
Software systems that optimize pallet usage, from warehouse management systems (WMS) to automated tracking and inventory management, have significantly enhanced productivity over the last hundred years. Skilled programmers will be responsible for developing and maintaining these systems, ensuring seamless integration with existing operations, and further reducing the need for manual labor. In this context, the role of software in driving operational efficiency will become even more critical as businesses adapt to a higher wage environment.
Forecasting
From a forecasting perspective, numerous factors are in flux, leading to constant variability and reassessment. Currently, there is a 17% probability that this will emerge as a key factor in disrupting the economy, in my opinion.