The 3rd quarter of 2023 felt a little like a case of the “hangries.” Despite being at near full employment and having jobs a plenty (as of July there were 8.8 million job openings in the U.S., down from a March 2022 high of 12 million), thousands of workers are walking out and joining the picket lines in protest. The United Auto Workers (UAW), which represents the three unionized automakers in the United States—Ford Motor Company, General Motors, and Stellantis (commonly known as the Big 3), has strategically shut down five assembly plants and 38 parts warehouses over the past three weeks. Among some of their demands are a 30% increase in pay, a 32-hour work week, restoration of defined benefit plans and other cost of living raises.
This strike is just the tip of the iceberg. According to Time magazine, at least 453,000 workers have participated in 312 strikes in the United States this year. More recently, some 75,000 Kaiser Permanente healthcare workers, who serve roughly 13 million people across 39 hospitals, walked out, again over disputes on pay. Many of these workers made significant sacrifices during the pandemic, as their jobs played critical roles in keeping the country upright and moving and are now asking for something in return.
Despite the general health of the average American worker, the consumer is starting to feel the squeeze. The pandemic-era savings and stimulus checks that supported spending have dwindled, and higher interest rates and inflation have bitten the consumer in numerous ways (even with a 4% average growth rate in hourly wages). In July, the Atlanta Fed reported that the median American household needed 44% of its income to cover annual mortgage payments on a median-priced home, the highest since 2006. Car payments have also risen sharply with the average payment for a new car exceeding $700/month in the 2nd quarter (and the UAW strike may only make things worse). Credit card debt hit a record $1 trillion in 2Q as consumers increasingly tapped their credit lines as bank loans become harder to obtain.
On the housing front, existing home sales were down 15.3% year-over-year in August, (according to data from the National Association of Realtors) while at the same time, median home prices climbed 3.9% to $407,100. This increase in price is in spite of the 30-year fixed rate mortgage hitting 7.3%, the highest level since 2000. A telling quote from the association was, "supply needs to essentially double to moderate home price gains”. This inverse relationship between home prices and mortgage rates ties the Fed’s hands, as we desperately need inflation to cool, and shelter (up 7.3% over the past year based on CORE CPI) is a significant component of that equation.
Even if you are lucky enough to secure a home, you may be stuck with another problem. Home insurers are also “on strike,” backing away from insuring high-risk fire and flood zones in California and Florida. Companies like Farmers and State Farm have left homeowners in the lurch, forcing them to sign with state insurers of last resort at 10x the cost, or simply going uninsured all together. While both states sport beautiful beaches, they are not places you want to get caught “naked” without insurance.
And then there is the “soft service strike” that makes every hospitality experience either more expensive or awkward. Despite wage growth still hovering around 4%, businesses are encouraging employees to make more through tipping for things that we never left gratuities on before. And the sums aren’t small; 20%, 25% even 30%. Last weekend I had to take a double take when I saw a “3% kitchen appreciation fee” attached to my bill. Meanwhile, despite falling food costs, restaurant prices do not appear to be retreating. I must admit, I don’t even frequent Starbuck’s anymore as I’m tired of the baristas hanging out the drive through window, waving their credit card machine for a 25% tip on top of a $5 coffee. There is proof that consumers are beginning to trade down.
OPEC is even jumping in the “walk out” game as they have been slowing production and taking a very disciplined approach to keeping oil prices in a range that is profitable for them. After negatively contributing to inflation for much of the past year, gasoline prices were up 10.6% month-over-month in August. Going into quarter-end, oil spiked to one- year highs on news that stockpiles at the largest storage hub in the U.S. had dropped to the lowest level since July 2022 and were close to “operational minimums.” Forecasters expect oil prices to reach $100 per barrel in the coming months.
Snack aisles are also feeling the burn from the likes of the new break-through drugs Ozempic and Mounjaro which have exploded in popularity due to their ability to suppress the appetites of patients who are at risk of diabetes, heart attack and stroke. While these pills are short of a miracle and could provide significant savings to long-term healthcare expenses, employers and insurers are skeptical to pay due to the number of potential “recreational” users. Either way, snack food companies have been interrogated on CNBC on their long-term strategic plans to keep pushing junk food. (the Wall Street Journal highlighted that nearly 24 million people, or 7% of the US population, may be taking such drugs by 2035).
Finally, we would be remiss not to mention the strike on Washington. A minority of Republicans went on strike, taking a stance against further deficit spending on Ukraine to focus instead on the issue of securing the U.S. border. Despite their disapproval, the then Speaker of the House, Kevin McCarthy, forged an agreement with Democrats, which allowed the House to pass an 11th hour deal to thwart a government shutdown, albeit only through mid-November. After ousting McCarthy, Republicans now need to select a new leader, hopefully in less than 15 votes.
Thank goodness at least the Hollywood writer’s strike has ended as I was concerned about my next Netflix binge! ChatGPT can do a lot of things well but writing a late-night show Top 10 list isn’t one of them.
Closing Thoughts
The U.S. economy has been surprisingly resilient in the face of sharp rate hikes, while inflation has moderated but still remains stubbornly ubiquitous. The widespread consensus is for rates to remain “higher for longer.” That said, several thorny issues outside of the Fed’s control make its ongoing mission more difficult. A government shutdown was avoided—at least until Nov. 17—but the outcome is far from certain. Rising energy prices pose another threat to inflation/economic growth. The resumption of student loan payments in October may take a bite out of consumer spending, which has been a pillar of support for the U.S. economy. Not to mention an upcoming Presidential election year and ongoing geopolitical concerns.
The road ahead is likely to be bumpy, but as always, we continue to recommend a disciplined investment process with a long-term strategy. No walkouts allowed!