Reaction to GDP and ADP

NEW YORK (Reuters) - U.S. growth skidded lower in the fourth quarter and was the weakest in five years for all of 2007, according to a government report on Wednesday that highlighted the toll an enfeebled housing sector has taken on the national economy.

U.S. private employers added 130,000 jobs in January, a report by a private employment service said on Wednesday.

ADP Employer Services, whose employment report was jointly developed with Macroeconomic Advisers LLC, also said it revised downward the number of jobs created in December to 37,000 from 40,000.

COMMENTS:

IAN SHEPHERDSON, CHIEF U.S. ECONOMIST, HIGH FREQUENCY ECONOMICS, VALHALLA, NEW YORK:

ADP:

"ADP has proved itself horribly misleading several times over the past year but the fact remains that it is the best (least bad, anyway) single advance indicator of payrolls.

Accordingly we are inclined to move up our estimate for the official headline number on Friday to 100,000 from 50,000. The trend in core payroll growth is slowing and will soon dip into negative territory, but in any given month, anything can happen."

PETER BOOCKVAR, EQUITY STRATEGIST, MILLER TABAK & CO., NEW YORK:

ADP:

"These numbers are only relevant in whether it influences or changes what the Fed was going to do today. Certainly the ADP number was a surprise to the upside, but we need to see other job data points... ADP in the November-December time frame has had some issues with seasonality, so we'll see whether it's corroborated by Friday's payrolls number.

GDP:

"No question the GDP number tells us the economy is on the brink of recession, if not in one already. I think it gives the Fed all the cover it thinks it may need to get away with cutting 50 bps without engendering criticism of panicking."

RICHARD DEKASER, CHIEF ECONOMIST, NATIONAL CITY CORP., CLEVELAND:

GDP:

"It's a bit disappointing. I came in less than half of what I was expected. The 2-percent growth in consumer spending is quite a below where I was.

By far and away, it's the housing market which was affected by shutdown of the private label market in the fourth quarter.

Inventory also subtracted from growth substantially. That was another contributor to the soft fourth-quarter (GDP). There is no excess inventory hanging over the manufacturing sector, which is actually a positive development for manufacturers in the beginning of 2008.

The inflation news clearly shows that the Fed is not out of woods in attaining price stability. So long as inflationary expectations are contained, it needs not to be overly concerned with short-term inflationary developments.

The longer the Fed tolerate core inflation running above its comfort zone, the more likely inflation expectations will rise. Right now, the risk of a recession is neutralizing inflation expectations.

The bond market is betting that economic weakness will create the slack to contain inflation."

MICHAEL WOOLFOLK, CURRENCY STRATEGIST, BANK OF NEW YORK MELLON:

GDP:

"It came in weaker-than-expected as we were anticipating. It should be overlooked because it's due to some weak assumptions about contributions to net exports. The government does not have the December trade figure to use in calculating this, so they rely upon historical trends and net exports were stronger in December than historical trends because of the weak U.S. dollar. In terms of policy, the focus should be on the core PCE number. The Fed has to be very careful in terms of what it does in terms of slashing interest rates now for fear of fueling inflationary pressures. This is along with other data we have had so far this week. A very strong argument for cutting 25 basis points rather than 50 basis points this afternoon."

KEVIN FLANAGAN, FIXED INCOME STRATEGIST FOR GLOBAL WEALTH MANAGEMENT, MORGAN STANLEY, PURCHASE, NEW YORK:

GDP:

"The GDP number was certainly weaker than expected. It does

not provide a good launching pad for first quarter GDP (for which) we would expect to see something in negative territory. In core PCE we have seen the improvement stop. The inflation numbers won't be as friendly in early 2008 as in mid-2007."

ADP:

"Bond prices have come off the lows a little bit following the ADP report. That is considered more current data and a harbinger of Friday's employment report."

JIM DEMASI, CHIEF FIXED INCOME STRATEGIST, STIFEL NICOLAUS & CO, BALTIMORE:

ADP:

"It's a surprisingly strong number and it's not consistent with what market is expecting for the nonfarm payrolls on Friday. It's causing the market participants to pause today and make them take a second look what the Fed will do later today.

"I don't think the ADP will change the Fed's position.

"I think you are seeing a broad selling across the board (in Treasuries), but it's a knee-jerk reaction."

RON SIMPSON, DIRECTOR OF CURRENCY RESEARCH, ACTION ECONOMICS, TAMPA, FLORIDA:

ADP:

"This is considerably higher than expected and it draws a new drama on Fed day. In the big picture, the ADP report hasn't been particularly useful and it's just one month. But given the market's mood, this should pare back expectations of aggressive Fed easing and put the 25 basis-point cut back on the table. That should help the dollar."