Striking on the dock of the bay

Early this morning, approximately 45,000 dockworkers who load and unload cargo ships at all 36 ports from Maine to Texas walked off the job. Almost 30% of all U.S. trading volume is impacted, with container cargo and auto shipments halted at the ports. Energy supplies and bulk cargo won't be affected. The dockworkers are employed by private companies under a master contract. Negotiations between the International Longshoremen's Association (ILA) and United States Maritime Alliance (USMX), which represents the major shipping lines as well as terminal operators and port authorities, stalled in June. Both sides remain far apart in terms of both salary and automation concerns. The impact of the strike on the financial markets and the economy will depend on how long it lasts and the political consequences.

The ILA's initial demands include a 77% wage hike over a six-year contract, with the labor group arguing that the increased pay would make up for the surge in U.S. inflation in recent years and would put them on par with the West Coast dock workers, who belong to International Longshore and Warehouse union and are currently paid more. They completed their own contract negotiations last year with a 32% wage hike over six years. It's worth noting that the ILA proposal boils down to only a $5-an-hour raise each year. Additionally, the union wants a total ban on automation of cranes, gates and container-moving trucks used in the loading or unloading of freight.

While encouraging a compromise, the Biden administration is reluctant to intervene. A provision of the Taft-Hartley Act allows a president to intervene on labor disputes that could be a danger to US economic health. While it does not allow the president to impose a contract, he could send longshoremen back to work for 80 days as negotiations continue. Unsurprisingly, labor loathes the Act. If Biden were to invoke it, he would face the ire of unions everywhere only a few weeks before his party's tight presidential election. The ILA endorsed Biden in 2020 but hasn't yet backed either Kamala Harris or Donald Trump. During an exchange with reporters on Sunday, Biden said "no" when asked if he planned to intervene in the potential work stoppage. "I don't believe in Taft-Hartley," he added.

But the strike-the union's first since 1977-could have profound implications for retailers and consumers ahead of the holiday shopping season. Analysts say the work stoppage could cost the U.S. economy $5 billion per day or be a 0.1% hit to annualized gross domestic product for every week the strike continues. Analysts also say that it could take around five days to clear the inventory from a one-day strike. Some large retailers had rerouted shipments and increased the amount of inventory to compensate. This heightened inventory to sales could blunt the impact if the strike is short. But supplies of perishable imports will be impacted almost immediately. There is no getting around it, a strike lasting more than a few weeks could devastate the nation's supply chain, potentially leading to higher prices and delays in goods reaching households and businesses.

Potential impact on monetary policy and investors

We enter the final quarter of the year on the heels of record highs in stocks and positive returns in bonds. But with a data-dependent Fed and the election looming large over markets, the strike is perilous and bears potential consequences to both. The economic impact and market volatility will be magnified the longer it lasts, and ultimately that could determine how investor portfolios finish the year.

The port strike could influence the Federal Reserve's rate-cutting path. Depending on its duration, the shortage of consumer and industrial goods would likely drive-up prices. While inflation isn't expected to skyrocket as it did due to the supply-chain disruptions of the pandemic, we expect it would tick up. Even a small increase could influence the Fed and perhaps cause it to pause the rate-cutting cycle it just began. Wage increases can also be inflationary, another factor for its policy decisions.

A prolonged work stoppage could also impact the job market, leading to layoffs in manufacturing as companies struggle with a lack of raw materials. The knock-on effects for other workers who support the port could also be impacted as demand is limited for truck drivers, rail operators and other parties related to port operations. The strike won't impact the September jobs report but could have a huge impact on October's if the strike continues. The data from the survey week ending October 11 will be central to the jobs report to be released on Nov. 3, which is two days before the election and four days before the next Fed meeting. Weakness there could impact decisions by the Fed and voters.