Top Supporting Factors for 2007

There are many factors that will help the U.S. avoid a recession in 2007 and limit both the depth and duration of any bout of economic weakness.

Inflation expectations: Crucial toward any economic expansion is low inflation and low inflation expectations. After a rocky start, Fed Chairman Ben Bernanke has earned the respect of the $27 trillion bond market, which will help sustain a favorable interest rate environment and encourage businesses to plan for expansion without concern for inflation.

Corporate cash: Evidence is plentiful that indicates corporations are flush with cash. Cash relative to capital spending hit a new high last quarter, helping assure plentiful internal funding to fuel the economic expansion. High levels of cash relative to capital expenditures bode well for capital spending in 2007, especially in the context of the strength of the global economy.

U.S. exports: The weaker dollar and the most synchronous global growth in more than 30 years have boosted U.S. exports to gain close to 15% versus a year ago in recent months, more than 2.5 times the normal year-over-year gain. This is giving U.S. factories an added $20 billion per month in new business compared to a year ago.

Government spending: State and local spending is expected to increase more than 7% this year after a robust 2006. This is slightly above the long-term average. Federal spending is also likely to gain at a fast pace. Government spending is often overlooked when analyzing the economy, despite the fact that it represents more than 20% of the economy.

Inventories: Despite a recent increase, inventories remain extremely lean. Inventories were once a leading cause of the booms and busts of the U.S. economy. No longer. Technology and improved inventory management have reduced the impact of inventories on the U.S. economic cycle. With inventories lean, production would need to be cut very little in order to adjust to any softening of demand.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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