Signs of slowing price pressures and wage growth have generated a lot of excitement about a soft landing for the US economy, where inflation glides back toward 2% without a painful recession. Pulling in the opposite direction is labor action that helped generate a $30 billion win for United Parcel Service Inc. workers last month.
The new terms, which give full-time UPS drivers around $170,000 in pay and benefits on average by the end of the contract, along with demands by the United Auto Workers — currently in tense negotiations with the biggest carmakers — highlight how the economy has shifted since the 2010s, when wage growth, inflation and interest rates were low. Investors hoping for a return to those days should temper their expectations.
The US economy is certainly enjoying some benefits from disinflation as the supply chain disruptions of the pandemic normalize, but that's unlikely to continue indefinitely if wage growth remains elevated for the workers who produce and transport the goods that power the economy. It will instead mean profit-margin pressure at companies such as UPS and Ford Motor Co. among others, or then higher prices for their customers. Undoubtedly, it will also complicate the task ahead for Federal Reserve Chair Jerome Powell as policy makers weigh whether they have raised interest rates enough to bring inflation down to their 2% target.
Unionized and non-unionized workers alike can win strong wage gains in industries such as logistics, manufacturing and construction because the unemployment rate is low and demand strong. Average hourly earnings growth for goods-producing workers has been close to 6% over the past year, notably skirting the deceleration in overall wage growth. This is the fastest pace of salary increases the category has seen since the early 1980s.
Transportation and warehousing workers such as UPS drivers saw some slowdown in wage growth in the second half of last year, but that has stabilized and appears to be picking up again at levels much higher than we've seen over the past 40 years.
And there's reason to believe this will continue. The goods and logistics economy appears to have bottomed in the second quarter of 2023 and, so far, the third quarter is looking like another strong one overall for growth in the economy. A structural lack of workers in these industries combined with a pickup in demand suggests wage growth should remain robust to attract and retain workers to jobs that are by their nature more physically demanding than office jobs.
But there are ways in which the economy can manage through these new dynamics without inflation being as much of a burden as it was in 2022.
UPS executives didn't talk about self-driving trucks in response to higher driver costs on their quarterly earnings call last week, but they did express optimism about productivity investments being made in their warehouses. The company has deployed technology that reduces error rates in warehouses and streamlines operations between warehouses and delivery trucks, saving itself money. Even though the contract negotiated with the International Brotherhood of Teamsters was more expensive than UPS had planned for, executives sounded confident that, over the long run, profit margins would not be negatively impacted in part due to productivity gains.
And on some level the pay workers in industries like driving and auto production had in the 2010s was unsustainably low and needed to rise. A UAW director emphasized on Bloomberg's Odd Lots podcast last week that the union accepted a pay package in the aftermath of the 2008 financial crisis that wasn’t favorable, but did so because they didn't want to see their employers go out of business. Today, however, they're looking to be made whole after the sacrifices they made in the 2010s. This puts upward pressure on worker pay and inflation in the short-term but is arguably more of a rebalancing in the labor market and economy rather than a structural shift in inflation.
It’s possible that over the longer run, automation and productivity gains combined with a normalization in pay levels of “physical economy workers” relative to knowledge workers bring wage growth and inflation back to levels that economists and policymakers would consider acceptable. But don't look for it to happen in the near future.
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