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September 5, 1997
On its face, the economic news was good this week, but the bond market struggled and closed today on a sour note, near the highs of the last month.
The "good" news began on Tuesday with the first-of-month report from the National Association of Purchasing Management (NAPM): overall activity slid from 58.6% in July to 56.8% in August. A slowing economy would tend to reduce inflation pressure, and keep the Fed on hold at its September 30 meeting.
Then, today, the "first Friday" data whopper from the Labor Department showed a very modest, 49,000-job gain in payrolls, and an uptick in unemployment to 4.9% -- again, the kind of news that should reassure bonds and the Fed.
Ordinarily, it's a mistake to over-analyze internal aspects of economic reports. However, the UPS strike appears to have caused more than ordinary distortions.
UPS has gradually reached the status of public utility, supplanting many of the original functions of the Postal Service, and now thoroughly permeating the economy. (This utility status was lost on UPS management: utilities can't fight strikes for long or their customers will withdraw the franchise. Permanently.)
The NAPM survey taken in the last week of August asked some questions about the strike. 90% of the purchasing managers surveyed said that they had suffered at least a "moderate impact" on their ability to obtain goods from suppliers, and 69% had at least moderate difficulty shipping goods. Note the imbalance in the difficulty of shipping and receiving: shippers were shipping, but forced into snail mail; hence receivers weren't receiving.
It's not a great leap of intuition to suspect that the drop in August NAPM was attributable to the difficulty of transferring goods from business to business and business to consumer. Without the strike, NAPM would have been well above the Fed-frightening 58% level.
Nor is it an Oliverstonism to assume that the strike distorted the labor market. If I can neither ship nor receive, I'm not much in the mood to hire.
The direct labor market distortion is even more clear: in August, the Labor Department says "transportation" payrolls (where UPS is counted) declined by 153,000 jobs. Since 185,000 UPS workers were out on strike, it is fair to assume that the 153,000-job "decline" evaporated when the strikers went back to work. Therefore, payrolls actually grew by at least 200,000, net of the strike.
Bond traders ought to be worried, and they are.
T-bonds have rattled between 6.53% and 6.67% since the first week of August. That's a mighty small trading range in which to rattle, and small ranges don't last long. This one will break soon, and up is more likely than down.
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