Chart of the Day - whew!
As I drove down to Champaign this morning, I heard on the radio that the railroads & the unions had reached a tentative deal to avoid a strike. This had been the subject of discussion in the family of late, because there were thoughts to take the Amtrak to St. Louis for a
wedding instead of driving. When the risk of a strike was looming, driving was decided & as of last night, it seemed pretty prudent. Probably still is today as many services were canceled. Whew! Dodged that headache.

However, it isn't just Amtrak. In fact, it is mostly not Amtrak that was affected. Rail freight makes up about 27% of the freight moved in the US, second to trucks. In a story yesterday, the head of the national truckers association was asked if the truckers could pick up the extra freight in case of a protracted shutdown and he said we would need an incremental 500k trucks on the road. Hmm. Even if we could get drivers, that would seem to clog up a fair bit. Perhaps this is why rail freight has been holding strong and retailers building inventory, not because they can't sell it, but because they wanted redundancy in the case of a strike.

You see, the railroad unions are not the only ones in labor negotiations. Just staying on the
freight theme, we know the truckers in California as well as the stevedores that unload the docks are also having discussions now and a strike is possible in early Q4, right before holiday shipping. So there are more potential hiccups down the road.

It looks like the union agreed to a 24% raise over the next 5 years which includes an
immediate 14.1% raise paid in $1k installments. Seems generous but also necessary given the inflation we have seen. Do you think the truckers and the stevedores know what the railroad workers got? How about the Amazon employees that are trying to decide if they should unionize or not. Or the auto workers. Or the service employees unions. Or the teachers.

This will have ripple effects for many months to come. The chart today shows the Employment cost index vs. the CPI on a year over year basis. It has directionally kept up but not in magnitude. While inflation is up 8.3%, employment costs are up 5.1%. However, that
number is clearly going to rise. What do we think that rise in wages will do to corporate margins and therefore earnings? What do we think company commentary will be on that? Do we think they will be saying Whew?

As I have said many times before, inflation is more than just a number, it is a mindset. This is why the Fed is using jawboning & fwd guidance to convince us all that inflation WILL come lower. They will need to back this up with aggressive rate hikes at the next two meetings at least. As I tell my students, we do not know when a forest fire will start, but we can tell when the conditions are such that a fire could begin.

Stay Vigilant

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