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Auto workers strike rattles markets, sparks concerns over corporate profits

EditorVenkatesh Jartarkar
Published 09/15/2023, 04:28 PM
© Pavlo Gonchar / SOPA Images/Sipa via Reuters Connect
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The ongoing strike by the United Auto Workers (UAW) against leading car manufacturers Ford Motor Co . (NYSE:F), General Motors Co (NYSE:GM)., and Stellantis NV (NYSE:STLA) is causing unease among stock-market investors, who are concerned about the potential impact on corporate profits. The labor unrest, which has led to workers walking out of factories in Michigan, Ohio, and Missouri, occurred on Friday, with the possibility of further disruptions looming.

The UAW's demand for a mid-30% wage increase over four years is adding to the tension. This follows similar wage hike agreements by American Airlines (NASDAQ:AAL) and United Parcel Service (NYSE:UPS) earlier this year. Approximately 13,000 out of the UAW's 146,000 members are currently on strike at the targeted plants.

This labor dispute comes at a time when the job market is already tight, despite aggressive rate hikes by the Federal Reserve. Furthermore, a separate strike by film and television writers is still ongoing. If these strikes lead to new supply shortages, they could significantly affect the broader economy by driving prices up.

Corporate profit margins have been under pressure since they peaked two years ago in Q2 2021 as inflation began to rise. Margins fell for six straight quarters due to the reversal of the pandemic-induced boom but have rebounded over the past two quarters as real growth recovered.

Despite these challenges, some strategists argue that tight labor markets could be essential for productivity growth. They believe that such conditions can encourage companies to adopt new technologies, potentially leading to a productivity boom similar to that experienced in the 1990s due to tech investment. However, timing and magnitudes remain uncertain.

Stocks fell on Friday due to these concerns. The S&P 500 was down 1.1%, marking a fractional decrease for the week. The Dow Jones Industrial Average declined around 275 points or 0.8%, while the Nasdaq Composite lost 1.6%.

The current labor situation may lead to a continued rise in real wages, a fact that some believe isn't fully appreciated yet. This could mean that the consensus expectations for 12% earnings growth in 2024 might be overly optimistic.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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