Weekly Wisdom – August 31, 2023

By Hightower Great Lakes on August 31, 2023

The pandemic may be over, but it has left lasting impacts on the world. A notable shift is being seen in the labor market, where the balance between supply and demand is severely disrupted. There are a few reasons for this imbalance.

Opposite to the Great Recession of 2008, the pandemic-era fiscal and monetary stimulus induced one of the strongest bull markets on record, driving 18.39% and 28.7% returns in 2020 and 2021. Strong savings, compounded with fears of contracting the deadly virus at work, drove 2.2 million more people into retirement than previously expected.[1]

The imbalance in tandem with strong economic growth and higher inflation has transferred bargaining power from employer to employee.

A clear sign of the increased bargaining power is markedly higher average hourly earnings seen in the chart below. It is important to keep in mind that wages are a sticky component of inflation, meaning that wages are slow to respond to changes in the economy.

Another indication is the increase in labor strikes taking place around the globe as workers demand higher wages, considering both record corporate profits during the pandemic and the higher cost of living.

Thus far into 2023, more than 200 strikes have occurred, involving more than 320,000 workers, well-eclipsing the 116 strikes involving 27,000 workers over the same period in 2021.[2] The elevated number of strikes has even led to the coining of the term “Summer of Strikes.”[3]

Chart 1: Average Hourly Earnings Y/Y [4]

Some of the most prominent labor negotiations have or are currently occurring in the airline, transport, automotive and energy industries. While bargaining power has shifted to the laborer in these industries, the technology industry has been an outlier. Bloated SG&A expense lines in tandem with slower-than-historical growth has led to more than 165,000 layoffs year to date at technology companies.[5] 

Airline Industry Wages Fly Higher

The airline industry has been a topic of conversation this year for a couple of reasons. The first was the record bookings in the travel industry as we saw strong demand throughout the summer. United Airlines (UAL) mentioned on its latest earnings call that June was a record revenue month in company history.[6]

Furthermore, it extrapolated the demand into September/October, where it still sees strong bookings versus pre-Covid levels. We saw similar data from the TSA, as August passenger throughput numbers came in 34% above 2019 levels, which is the largest gap since this February.[7]

Since pilots and attendants have seen the strong demand firsthand, it is not surprising why they are wondering about a boost in hourly wages. Higher demand has forced airlines to come to the table and discuss more employee friendly contracts.

Earlier this year, we saw Delta Airlines (DAL) approve a new contract with its pilots, resulting in 34% raises over the next four years.[8] In hindsight, this deal spurred new discussions with numerous airline companies as other pilots looked to be compensated as well. American Airlines (AAL) announced a new agreement with its pilots union last week, in which they ratified a new four-year agreement, delivering over $9 billion of compensation to American’s 15,000 pilots.[9]

While ongoing, FedEx (FDX) pilots who belong to the Air Line Pilots Association just last month voted against ratifying a contract that would provide a 30% salary increase along with a 30% increase in pension benefits.[10]

It is important to note that despite the vote “no,” FedEx pilots will not be striking soon due to the Railway Labor Act, which places tall hurdles in the way of a union that has such a large impact on the daily movement of goods around the world. The main takeaway however is the pilots’ belief that they are due for a salary increase of more than 30%. FedEx’s main competitor just recently dodged a crisis in its labor negotiations with the Teamsters.

Teamsters Hold Out to Win Record Wage Increases

UPS’s (UPS) public battle with the Teamsters came down to the eleventh hour. The Teamsters represent roughly 330,000 UPS employees. The bargaining was rooted in the record profitability achieved by UPS during the pandemic, as demand for goods skyrocketed and consumers remained occupied spending much more time at home.

Considering UPS moves 6% of U.S. GDP daily, the workers physically moving the goods serve a vital function in the economy. UPS reported record operating income of $13.1 billion in 2021, a 51% increase y/y, which compares to a 7% increase in 2020. As part of the contract, newly hired part-timers will receive $21 per hour, an increase from the current $15.50 per hour, and double the increase in the prior UPS-Teamsters contract.[11]

By the end of the five-year contract, full-time employees will receive $170,000 in compensation and benefits. Included in the contract are improvements to the automobiles that UPS employees spend their days in, such as A/C in all larger delivery vehicles, sprinter vans and package cars purchased after January 1, 2024.

Auto Strike Poses More Than a Bump in The Road

The automotive industry is another key industry that is experiencing a potential labor disruption. Key themes such as the ongoing electrification of vehicles, elevated average vehicle age of over 13 years and initial recovery of new vehicle supply are driving this industry into the spotlight.^[12]

A 2021 survey sponsored by Citigroup Inc. (C) showed that the automotive industry was impacted most severely from Covid-related supply chain disruptions when compared to other industries. A total 51.7% of the supply chain managers surveyed said that disruptions to auto sector supply chains were “very significant.”^[13] This lack of new vehicles caused new and used vehicle prices to skyrocket.

The world is emerging from Covid’s supply chain disruptions, but there may be another disruption on the horizon. On August 25, 97% of members of the United Auto Workers Union, also known as the UAW, approved a strike against General Motors (GM), Ford (F) and Stellantis (STLA).

This strike would impact nearly 150,000 hourly workers and would begin on September 14 if an agreement is not reached. The union has some strong demands such as reopening pension plans and retiree healthcare, which could cost tens of billions of dollars. If these automotive companies were to satisfy all the UAW’s demands, it would cost each company around $80 billion in additional costs.^[14]

These aggressive demands further display the power that the U.S. labor force holds right now, especially when it comes to unions within large industries. It is estimated that the strike would cost each auto manufacturer around $400-500 million per week.^[15] Clearly, automotive manufacturers need a solution to avoid continued losses due to production disruptions.

Energy Crisis (Somewhat) Avoided

Another industry that has recently undergone labor disputes is the liquefied natural gas industry (LNG). LNG is a crucial energy source that allows people to cook, heat homes and generate electricity.^[16] In fact, natural gas accounts for about 25% of global electricity generation and is expected to become increasingly significant, with the global market expected to expand 8.9%, from $121.94 billion in 2022 to $132.78 billion in 2023.^[17]

This labor dispute is centered within Australia at Woodside Energy Group (WDS) and Chevron’s (CVX) LNG facilities. The two companies comprise 10% of global LNG production, therefore a labor disruption here would greatly impact global LNG markets.^[18]

The initial rumblings of the potential Woodside strike sent European natural gas prices soaring. The Woodside part of the issue has since been resolved before the potential strike date, which was September 2. The resolution of this labor dispute resulted in TTF prices falling 11.5%, hitting a two-week low at the time on August 24.^[19]

This resolution shows that overall, the worker does have a substantial amount of bargaining power currently, especially in essential industries like LNG. The potential strike at the Chevron plant, which accounts for 5% of global LNG production, is still on for September 7 if the union and Chevron cannot come to an agreement.^[20]

Close Eye on Friday Jobs Report

Naturally, labor contracts are renegotiated every few years, however, recent and upcoming negotiations are unique due to the events that have taken place since the prior contract agreements have been made. Given the pandemic, high inflation and imbalance between labor supply and demand, workers are in the best bargaining position in some time.

Labor agreements are not only based on, but also play a pivotal role in the labor data that is periodically released. Jobs data will be released this Friday, where average hourly earnings both m/m and y/y are expected to decline by 10 bps to 0.3% and 4.3% respectively, and average weekly hours worked is expected to remain constant with last month’s 34.3 hours.

Average weekly hours worked serve as leading indicators for the economy. Companies reduce hours worked if demand is waning, and vice versa, they increase hours if they are seeing increased demand.

Click here to read last week’s Weekly Wisdom (8/24).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: Marketplace. As of March 7, 2023.

[2] Source: CNBC. As of August 6, 2023.

[3] Source: Axios. As of June 27, 2023.

[4] Source: FactSet (chart). As of August 29, 2023.

[5] Source: Crunchbase. As of August 25, 2023.

[6] Source: UAL earnings. As of July 19, 2023.

[7] Source: TSA. As of August 29, 2023.

[8] Source: CNBC. As of March 1, 2023.

[9] Source: American Airlines Newsroom. As of August 21, 2023.

[10] Source: CNN. As of July 24, 2023.

[11] Source: SupplyChainDive. As of August 2, 2023.

[12] Source: POLK Average Age of Passenger Cars. As of December 31, 2022.

[13] Source: CNBC. As of August 25, 2021.

[14] Source: Morningstar. As of August 28, 2023.

[15] Source: Business Insider. As of August 17, 2023.

[16] Source: Chevron. As of February 15, 2023.

[17] Source: The Business Research Company. As of July 2023.

[18] Source: CNN. As of August 29, 2023.

[19] Source: Reuters. As of August 24, 2023.

[20] Source: Reuters. As of August 28, 2023.