Former Obama advisor Jason Furman cautioned on Monday that the ongoing strike by the United Auto Workers (UAW) could have a significant impact on the GDP growth rates.
What Happened: Furman highlighted that small changes can lead to substantial shifts in annualized GDP growth rates. He pointed out that if something reduces the GDP by $30 billion in a quarter, it translates to a 2 percentage point reduction in the annualized growth rate.
This could mean the difference between positive and negative growth. Furman further noted that the auto industry contributes approximately $200 billion per quarter, with the Big 3 automakers accounting for about half of that. He also mentioned that a strike is very unlikely to turn growth negative for third quarter since less than 1/6 of the period would be disrupted, equating to less than $16 billion or 1 percentage point of GDP at an annual rate. However, if there were a full month of disruption in October, it could total about $30 billion, though this could be partially reversed in the subsequent months.
Furman emphasized that one negative quarter doesn’t necessarily indicate a recession. He also pointed out that even if people could still purchase cars from existing inventories, this would still lead to a GDP reduction.
Lastly, Furman added a postscript noting that if a strike reduced Q3 GDP by $10 billion, it would need to reduce Q4 GDP by $40 billion to count as a net $30 billion reduction, or 2 percentage points on the annual rate.
See Also: Inflation Ticks Higher, UAW Strikes, ARMs Record-Breaking IPO: The Week In The Markets
Why It Matters: The UAW strike, which began simultaneously against the Detroit three automakers, namely General Motors Co GM, Ford Motor Co F and Stellantis NV STLA, comes after the union and the automakers failed to agree on pay hikes and other amenities.
This strike is historic as it’s the first time the UAW, with over 400,000 active members, has initiated a strike against all three automakers at the same time.
The potential economic ramifications of this strike, as highlighted by Furman, underscore the significant role the auto industry plays in the U.S. economy. The ongoing labor dispute and its potential impact on GDP growth rates are especially concerning given the industry’s recovery from the pandemic and semiconductor shortages. Recent reports suggest that the UAW’s demands include a 40% pay hike by September 2027, among other amenities.
Furthermore, the ongoing strike threatens the annual profit-sharing checks of Detroit’s Big Three, potentially wiping out significant profits. As the strike continues, it’s crucial for stakeholders, policymakers, and the general public to understand the broader economic implications, as highlighted by Furman’s insights.
Photo Courtesy: David Kn On Shutterstock.com
Read Next: Ford Faces UAW Strike In US, Now It May Have To Contend With Another In Canada
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