Will a Rail Strike Stop the US Economy in Its Tracks?
While a U.S. railroad strike was averted in September, and the U.S. Congress is currently working on legislation to prevent the planned December strike, there is a chance it might not be avoided this time. This adds to investors' concerns about the U.S. economic situation and its potential impact on their portfolios.
Estimating the economic toll
According to the Association of American Railroads (AAR), a shutdown could affect consumers and businesses across nearly all sectors of the economy. They estimate the economic damage could amount to USD 2 billion per day.1 Another analysis, by the American Chemistry Council (ACC), is more pessimistic, with a potential output decline of 1 percentage point and a surge in the producer price index of 4%.2
While these estimates vary significantly in their severity and might not be the most likely outcomes, they can help investors prepare for potential worst-case impacts to their portfolios. And so we use them to analyze two scenarios: a milder one based on the AAR's assessment, assuming a monthlong strike causing a short-lasting drop in output and additional inflationary pressure; and a more severe scenario based on the ACC's projections, assuming more severe and longer-lasting damage to the U.S. economy, along with a spike in inflation.
We assess the impact of these two scenarios on a hypothetical portfolio of U.S. equities and bonds. According to our assumptions and methodology, the portfolio could lose between 2% and 9%, depending on how severely this potential strike affects the U.S. economy.3
Impact across US asset classes under our scenarios
Portfolio impact of the scenarios based on market data as of Nov. 29. Equity markets and nominal sovereign and corporate bonds are represented by MSCI indexes. Inflation-linked sovereign bonds are represented by the Markit iBoxx TIPS index. The composite portfolio is represented by the following weights: 60% U.S. equities, 20% U.S. nominal sovereign bonds, 5% U.S. inflation-protected sovereign bonds, 10% U.S. investment-grade bonds and 5% U.S. high-yield bonds. Source: S&P Global Market Intelligence, MSCI
What we assume in our scenarios
Scenario assumptions are based on the AAR’s and the ACC’s estimates of economic damage and the MSCI Macro-Finance Model.
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1 “The Economic Impact of a Railroad Shutdown.” Association of American Railroads, Sept. 1, 2022.', '“New Economic Analysis Finds Rail Strike Could Fuel Recession.” American Chemistry Council, Nov. 16, 2022.', 'The shocks in these scenarios are not meant to be instantaneous, but rather on a horizon of roughly three months, as changes in the market will take time to materialize.
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