ISM Beats ADP in Bond Market

There are two competing views on the economy as we enter 2007. The first expects the negative effects of the weak housing and automobile sectors to wane, thus removing what has been a drag of about a percentage point from GDP.

This would put growth back above 3% sometime this year. The competing view looks for the weakness in housing and autos to spill over into other sectors of the economy, causing deeper weakening in the economy from the growth rate of about 2.0% experienced in the final three quarters of 2006. Today's economic news fuels this debate further, as it is conflicting.

Optimists can point to the Institute for Supply Management figure, which at 51.4 was up 1.9 points from November and 1.4 points higher than expected. It is also not far from its 20-year average of 52.4. The increase might signal waning influence from housing and autos, but the weak ADP employment figures suggest otherwise.

A reading of 51.4 has been consistent historically with GDP advancing at a 3.2% clip, according to the ISM. Most of the rest of the details within the ISM report were plain vanilla.

The data on construction spending continue to reflect weakness in the residential construction arena, with the sector recording a decrease for an eighth consecutive month. Residential construction spending is now down 11% vs. a year earlier, at $598 billion, the lowest level since November 2004.

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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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