Top Supporting Factors for 2007

U.S. banking system: The U.S. banking system is in extremely strong shape at present. Nearly 100% of bank assets are now held at well-capitalized banks and the vast majority of statistics point to strength. A feature of the 1990 recession was weakness in the banking system, underscoring the importance of the banking system to the economy.

Household wealth: This factor represents both a buffer and a risk for the economy, but at present it is a feature of strength. Household net worth hit a record $54 trillion at the end of September, up $14 trillion over five years and $30 trillion since 1995. If there's a risk here it is to home prices, but with home construction plunging and demand stabilizing, the risk to home prices is falling. Hence, household net worth should hold up.

Financial conditions: Stock values are up, the dollar is down, credit spreads are tight, and yields are down. All of these factors support growth. For example, a 10% drop in the dollar is roughly equal in effect on GDP to a full percentage point decline in the fed funds rate.

Working capital: The commercial paper market continues to expand vigorously, suggesting that businesses are very confident in the near-term outlook on revenues. SEC rules state that commercial paper can be sold for transactions purposes only, so the strong pace of issuance ($1.9 trillion outstanding, double the size of the T-bill market and up 20% vs. a year ago) suggests that companies expect to be able to convert the proceeds into revenue.

Political change: The recent election has given consumer confidence a lift, with the electorate now looking forward to greater inclusion in decision-making that will impact the populace.

Risks include abrupt slowing in China's economy, oil, premature acceleration in housing starts or a spike in credit spreads that raise risk premiums.

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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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