[PEN-L:11691] Fed Watches UPS Strike re: Interest Rate Hike -- Or Maybe Not

[Michael Eisenscher <meisenscher@xxxxxxxxxxx>]

Analysts: Strike May Cause Fed to Sit Tight
 05:52 p.m Aug 11, 1997 Eastern

 By Knut Engelmann

 WASHINGTON (Reuter) - A protracted strike by United Parcel Service workers
is certain to
 hurt the U.S. economy but may help persuade the Federal Reserve to keep
interest rates steady
 for a while, analysts said on Monday.

 UPS is the nation's largest package handler, delivering 12 million packages
a day and about 3.15
 billion every year. Almost one out of every 400 American workers is
employed by the privately
 held Atlanta-based company.

 The U.S. economy, and the nation's vibrant service sector in particular,
depends on firms such as
 UPS to supply and replenish merchandise just when and where it is needed.
That reduces the
 need to maintain high inventory levels, helping retailers and manufacturers
to cut costs and be
 more profitable.

 ``The economy will be affected, there will be some things that won't get
done that otherwise
 would in a timely way,'' said Marvin Kosters, an economist at the American
Enterprise Institute.

 ``One could be talking about significant business losses,'' agreed Lynn
Reaser of Barnett Banks
 Inc. of Jacksonville, Florida.

 The longer-term impact of the strike could be more fundamental, observers
say. It could delay a
 widely expected pick-up in economic growth in the third quarter, thus
helping to prolong what
 many analysts have come to describe as U.S. economic nirvana: steady growth
with low
 inflation.

 ``What's likely to happen is a continuation of a more sluggish
environment,'' said Kathleen
 Stephansen of Donaldson, Lufkin & Jenerette Securities Inc. in New York.
``The bounce-back
 will be delayed.''

 That could help convince the Federal Reserve not to raise interest rates
when its policy-making
 council next meets on Aug. 19 to consider rate strategy. Fears that rates
may rise amid the first
 signs of accelerating growth roiled bond and stock markets at the end of
last week.

 ``If the strike were still underway (and) the Fed took action it would pile
on what's already a bad
 situation,'' said Everett Ehrlich, president of consultancy ESC Co.

 The Fed last raised short-term interest rates on March 25 by a quarter
percentage point to ward
 off price pressures before they could translate into higher inflation.

 Barnett Banks' Reaser said said the UPS strike could even reduce growth in
the third quarter of
 this year by up to one percentage point.

 ``If the strike persists for four weeks or more, the output will not be
recovered, it will be
 permanently lost and there will be some dampening of the economy,'' said
Reaser.

 Gross domestic product growth slowed to 2.2 percent in the second quarter
of this year, down
 from 4.9 percent in the first quarter, but was widely expected to pick up
speed again in the
 July-September period.

 For now, neither U.S. central bankers nor the government appear too worried
about the strike's
 impact.

 The White House on Monday reiterated tht the president could intervene only
if the strike began
 to ``imperil the national health and safety'' -- which it had not yet.

 Federal Reserve Governor Susan Phillips said last week that she was ``not
too worried at this
 point''.

 However, the Small Business Administration issued a statement in which it
said small companies
 ``are being hard hit'' by the strike. It urged commercial lenders and other
creditors to be sensitive
 to the effect of the strike should small firms experience cash-flow
problems due to the stoppage.

 UPS has said that the strike by some 185,000 of its employees represented
by the Teamsters
 union means that 5 percent of the nation's entire economy is not moving.

 Chief Executive Officer James Kelly said over the weekend UPS would not
hire replacement
 workers yet, even though the company was losing ``hundreds of millions of
dollars a week''.

 UPS' competitors have reported a surge in business as a result of the
strike, and the U.S. Postal
 Service has added extra delivery shifts to cope with the sudden increase in
volume.

 Copyright 1997 Reuters Limited. All rights reserved. Republication and
redistribution of Reuters content is
 expressly prohibited without the prior written consent of Reuters. Reuters
shall not be liable for any errors or
 delays in the content, or for any actions taken in reliance thereon.

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 Retail Sales Data Seen Shaping New Fed View
 05:52 p.m Aug 11, 1997 Eastern

 By Steven Scheer

 NEW YORK (Reuter) - Retail sales data due Wednesday are expected to give
the bond
 market a fresh view on the strength of the economy's third-quarter growth
and also shape
 Federal Reserve policy.

 ``This number is important for both market psychology and to test what has
been discounted'' as
 far as monetary policy, said Steven Ricchiuto, chief economist at ABN AMRO
Chicago Corp.

 Less than two weeks ago, ``the market said the Fed is on hold forever and
they were never
 going to tighten again. This (data) will determine how much tightening it
put back in,'' he said.

 Economists noted a shift in sentiment away from the rosy economic scenario,
which was popular
 until the beginning of August.

 Wall Street had long believed the economy could continue to grow strongly
without boosting
 inflation. But various purchasing managers' reports, which showed solid
economic growth and
 higher prices, and strong July employment data have changed that view.

 Now, rather than expecting the Fed to stay on hold and possibly ease the
cost of borrowing next
 year, the market has started to talk about a tightening as early as September.

 ``This is a pivotal number to analyze psychology,'' said Ricchiuto.

 The Commerce Department is set to report on retail sales Wednesday at 8:30
a.m. (1230
 GMT). Overall sales in July are expected to have risen 0.7 percent, with
sales excluding autos
 seen up 0.4 percent, according to a Reuters poll of economists.

 But in the wake of strong auto and chain store sales figures, some analysts
are looking for
 stronger numbers.

 Brian Jones, economist at Salomon Brothers, predicts a 1.1 percent overall
retail sales gain and
 a 0.5 percent rise in the core rate along with upward revisions to June data.

 Even so, he said, ``retail sales may understate consumer spending,'' since
the series incorporates
 spending on goods but not on services.

 Goods spending comprises only 40 percent of the total, leaving the
remaining 60 percent
 spending on services unaccounted for until the end of the month, when
personal spending
 expenditures data are released.

 In addition to auto and department store spending, sales at drugstores, gas
stations and on
 building materials and furniture are expected to have boosted retail sales
in July, economists said.

 Although bond yields already reflect expectations of a strong set of
numbers, Treasury prices
 could fall further if the market's fears are realized.

 ``We're going through a worry phase where strong growth begets fears of
higher inflation,'' said
 Mitchell Held, chief economist at Smith Barney Inc.

 On Monday, the benchmark 30-year Treasury bond was up 2/32, or 62.5 cents
on a $1,000
 bond, lowering its yield to 6.63 percent from 6.64 percent Friday. Bond
prices and yields move
 in opposite directions.

 Copyright 1997 Reuters Limited. All rights reserved. Republication and
redistribution of Reuters content is
 expressly prohibited without the prior written consent of Reuters. Reuters
shall not be liable for any errors or
 delays in the content, or for any actions taken in reliance thereon.