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September 1, 1989
The bond market is shaky this morning in response to stronger than expected employment data. Payrolls grew by 110,000, and Unemployment remained unchanged at 5.2%. Both reports understate the actual strength of the economy as both exclude 108,000 striking telephone workers.
In other data this morning, the Purchasing Manager's index fell marginally to 45.2%, but nevertheless is a welcome sign of weakness. Leading Economic Indicators rose .2%, and the prior month was revised from down to unchanged.
In other data this week, The Second Quarter GNP was revised from a gain of 1.7% up to 2.7%, very close to the Fed's panic threshold. Personal Income and Consumption each gained .7%, and preliminary August Retail Sales look healthy. New Housing Starts exploded to a 14.4% gain in July, and Factory Orders declined 1.7%.
Bond trading was quiet all week despite the flood of economic data. August is the traditional investment bankers' vacation month, and in its last week not a decision maker is to be found on Manhattan island. All are in the Hamptons, sitting in the rain, plotting advantage when the whole sharpelbowed gang returns on Tuesday morning.
There is still a lot of market hope that the Fed will ease again, and I think the market will be disappointed. Except for the usually reliable Purchasing Managers' report, the economy looks too strong. Though the Fed has succeeded in slowing inflation, prices can rise suddenly in an economy gowing as fast as this one is.
The irresponsible political pressure on the Fed to ease tends to make bond investors wary. The Fed has to stay out in front of inflation, but Congress and the White House are conspiring to forbid the Fed to act again until renewed inflation arrives. Our representatives are content with 5% inflation (thereby risking a spike to 7%) in a painful disagreement with Mr. Greenspan who continues to announce a goal of zero.
There is no constituency for zero inflation, except bankers who don't want to be paid back in inflated dollars. Though next week may continue our twoweek calm, I'll guess that the Fed is more likely to be fighting renewed inflation than a recession by Halloween.
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