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Political Economy
Posted at 02:25 PM ET, 08/01/2011

Wall Street claps politely to debt deal, tells Washington to get back to work on economy

It’s time to get back to worrying about the economy.

That was the message U.S. stock markets sent to Washington on Monday after the White House and congressional leaders unveiled the outline of a deal that would gradually lift the Treasury’s limit by up to $2.4 trillion through 2013.

If Congress moves on the bill by tomorrow, the deal will immediately grant the Treasury the power to borrow $400 billion, refilling its coffers just in time to avoid a default and spark armageddon in the financial markets.

Seems like U.S. investors should be thrilled — except they’re not.

After initially rising more than 1 percent on news of the deal, major U.S. stock indexes quickly retreated, did a u-turn and slid more than 1 percent, where they remained as of early Monday afternoon trading. This despite a bonanza of positive trading in Asia and Europe once the debt deal was announced.

The likely reason? The Institute of Supply Management, an Arizona-based group that publishes industry studies and data, released its latest read on U.S. manufacturing which showed that the sector was at its weakest point since July 2009, when many economists think the recession ended.

The Institute’s factory index slid to 50.9, a level barely above 50, which signals the manufacturing sector is growing. That was well below even the most pessimistic estimate in a Bloomberg survey of economists, who predicted a decline to 54.5.

Stocks’ sharp u-turn is not surprising, given that the ISM’s manufacturing survey is the most influential economic indicator published by the private sector. Plus, fueled by a weaker dollar, federal stimulus dollars and Washington initiatives to boost exports, the manufacturing sector had actually been helping fuel the economic recovery. Now it’s not so clear whether it will continue to do so.

Add that to Friday’s dismal GDP report, which showed the economy growing only 1.3 percent in the spring, and last month’s third consecutive increase in unemployment, now at 9.2 percent, and soon it becomes clear that the spring’s so-called “soft patch” of economic activity is still front-and-center on investors’ minds.

So suffice it to say that Washington got a polite clap from Wall Street for not throwing the economy into recession. But now it’s back to work, and unless something changes on the economic front, there won’t be much applause any time soon.

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By Cezary Podkul  |  02:25 PM ET, 08/01/2011

 
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