What Mattered This Week? The Real Economy

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Last week was all about financial factors, primarily interest rates. But this week was all about the real economy, notably the United Auto Workers (UAW) strike and the pending government shutdown. Indeed, worries about a recession rose on those two risks. And while interest rates ticked up a bit, it was much less than last week and generally within a range. The same applies to financial markets as well.

Labor Looking for Gains

The auto strike is historic for several reasons. Notably, it is the first major industrial strike in years. But even more than that, it is the first time all three major automakers have been struck at the same time. Labor, in the form of the UAW, clearly feels that it has enough clout to force the companies to pay more—and to take on all of them at the same time. So far, that looks like a reasonable bet. Going forward, this suggests that labor in general will capture more gains, and that will be a big change. It also suggests wage growth will stay high by historical standards. This will keep inflation higher and the Fed in hawkish mode, which is likely one of the factors that pushed rates up again this week.

Government Shutdown in Unchartered Territory

The pending government shutdown, of course, is not historic. We’ve seen this several times in recent years. What is different this time is that instead of a confrontation on a specific issue between parties (e.g., the debt ceiling), this time it is based on intraparty conflict within the Republicans on a range of issues. On the one hand, this means it will be harder to resolve and might drag on longer. On the other hand, there is an easy out if the majority of Republicans decide to cut a deal with the Democrats. So, it could go either way. For the moment, we are in uncharted territory. And that uncertainty has also likely acted to push rates up.

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