Yesterday’s unexpected rise in the nonmanufacturing sectors of the U.S. economy delivered another blow to pessimists anticipating an imminent slowdown.
The Institute for Supply Management reports that its nonmanufacturing index rose to 60.5% last month from 60.1% in February. That’s well above the 59% reading called for by the consensus estimate. March’s reading also confirms the sharp rebound in February after January’s drop to 56.8%, a dip that gave short sellers in the stock market a momentary burst of optimism.
But it’s getting tougher to see the glass half empty rather than half full. Indeed, the service side of the economy (which dwarfs the manufacturing component) is expanding at a healthy clip. What’s more, its broad based. “Thirteen of 17 non-manufacturing industry sectors report increased activity in March, compared to 10 that reported increased activity in February,” ISM’s press release advises.
Nomura Securities’ chief economist in New York, David Resler, yesterday observed in a note to clients that the ISM nonmanufacturing index’s rise last month “is well above its six-month average and signals a broadening expansion in the services sector.”
More encouraging news on divining the future for growth comes this morning by way of the weekly update on jobless claims. Initial claims for unemployment insurance dipped below 300,000 again for the week ended April 1, the Labor Department reports. That’s down by 5,000 for the week, and 47,000 below the year-earlier figure. If a broad economic stumble is coming, it’s not evident in the jobless claims numbers.
Ditto for the so-called continuing claims for unemployment, a series that dropped to its lowest levels in the week through March 25 since January 2001, as the chart below illustrates.

It seems safe to assume that the labor market remains robust at the moment.
But if you thought the bond market would be growing increasingly anxious over such news, think again. Yes, the 10-year Treasury Note sold off last week, raising the current yield to nearly 4.9%, up from under 4.7% in late March. But bond traders once again are having second thoughts about selling. Buyers this week have overcome the sellers, keeping the 10-year Treasury yield from breaking above 4.9%.
There are, of course, a number of competing theories about where interest rates are headed. There are those who say that the economic growth implied by the labor market, the service sector, and elsewhere suggests higher rates. But that’s only one school of thought. Indeed, if you buy into the global savings glut argument (which Fed Chairman Ben Bernanke is fond of promoting) you can make a case for expecting steady if not falling yields in the weeks and months ahead.
The stock market has no problem with all the back and forth in the land of fixed income. The S&P 500 is trading near its highest since 2001. Small cap stocks are doing even better–much better. The Russell 2000 index has continued making new all-time highs, having soared beyond its old highs of 2000 for more than two years.
The momentum is likely to roll on till it stops. Unfortunately, no one will issue a press release when that moment comes. Nonetheless, Wall Street and other enlightened souls love to play the game of predicting turning points. For the rest of us, there’s asset allocation.
Copyright 2006 by James Picerno. All rights reserved.