UPS Drivers Deliver a Message to the Federal Reserve

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.

Wage Pressures