WASHINGTON — The pending congressional deal to raise the national debt ceiling removes a layer of uncertainty that's hovered over the struggling economy, one that saw new signs of stalling Monday.
The eleventh-hour deal that President Barack Obama announced Sunday night provided the briefest of bumps up to stocks early Monday morning. But after opening up, all three major indices immediately turned south after glum news from the manufacturing front.
The Institute for Supply Management's Purchasing Managers' Index was down more than expected, to 50.9 from the previous month's rating of 55.3. A measurement of less than 50 usually signals an economy in contraction, so the plunge in the manufacturing number was a splash of cold water in the faces of investors.
"Now that the debt-ceiling deal (assuming it passes) has averted an imminent catastrophe, attention can return to the underlying state of the economy. The news there isn't good," Nigel Gault, the chief U.S. economist for forecaster IHS Global Insight, wrote Monday in a note to investors. He added that manufacturing, "like the rest of the economy, looks stalled right now. And it's hard to see how the debt-ceiling deal will improve things — it just avoids making things much worse."
The congressional deal also appears to do little to address the big cost drivers behind growing federal budget deficits, such as Medicare, Medicaid and defense. This led many economists to worry that at least one of the three major credit-rating agencies — Standard & Poor's — may still downgrade the gold-plated AAA rating that U.S. government bonds historically get. A downgrade could raise borrowing costs for businesses and consumers alike, as well as government.
Moody's Investors Service signaled late Friday that it wouldn't immediately downgrade U.S. creditworthiness, even if the debt ceiling deadline were missed. A downgrade would follow only if there were a failure to pay bondholders, however briefly. Fitch Ratings, the smallest of the three top raters, put out a notice last Wednesday that said that absent a breech of the debt ceiling, it'd review the U.S. debt outlook later in August, but it signaled that it saw positive signs in the U.S. economy.
If S&P goes it alone and downgrades U.S. debt without Moody's going along, economists think it'll get a ho-hum response on Wall Street.
"Call it a tie ballgame, and my guess is the markets aren't going to react to that as much as if both of them were downgrading," said Stuart Hoffman, the chief economist for PNC Financial Services Group in Pittsburgh.
The stock market was "underwhelmed by the deal that got done," Hoffman said, adding that it's good news for the economy that under the deal, steep federal spending cuts won't begin until 2013.
"I think one of the implications is the economy gets the uncertainty out of the way," he said, echoing the view of many economists that the hyper-partisan Washington debate weighed on business and consumer confidence and probably cost the economy growth and jobs.
Growth during the second quarter came in below expectations at an annualized rate of 1.3 percent from April to June, the Commerce Department reported Friday. It also revised the growth rate from January through March down to just 0.4 percent. The trend points to an economy that's stuck in neutral, and Monday's manufacturing numbers from purchasing managers added an exclamation point.
"The silver lining in these numbers — if there is one — is that the PMI remained above 50, its threshold for expansion, but only barely," Chad Moutray, the chief economist for the National Association of Manufacturers, wrote in his blog Shopfloor.
The survey also points to a slow start to economic growth in the current quarter, although the hope is that the index will rise back to the number — around 60 — that it enjoyed early this year. After all, Congress will be out of town most of August, keeping gridlock out of the news.
"The stalemate over the budget deficit situation has not helped, only adding new levels of uncertainty to the equation," Moutray wrote, adding that surveys showed manufacturers relatively upbeat about prospects going forward. "If we are going to see the economy move out of neutral we will need to see a stronger manufacturing sector, and we can hope that August and September start to revive production activity for a better second half of 2011."
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