Tuesday, August 02, 2011

Economy weakens in wake of two months of political chaos

With Treasuries a safe haven again and more data that shows continued weakening of the economy, stocks continued their sell-off today with an afternoon collapse. Did the politicians think that they could terrorize the financial markets for two months and then, with a mangled compromise, step out into the cheers of an appreciative nation and adoring investors?

During the final month or more of this embarrassing display of bipartisan political petulance, businesses have been on hold. Hiring slowed generally, or stopped in small businesses, and new investment and borrowing decisions were put on hold as the coming state of the credit markets became more and more opaque. M&A activity presented a facade of real financial market activity and benefits for some stockholders, investment bankers, and private equity firms, but one must remember that M&A activity is often about cutting overlapping functions or, in other words, eliminating jobs.

Recovering from this slowdown in most productive business activity, otherwise known as growth, will not come overnight. There is now still the nagging issue of the rating agencies and how they view U.S. Treasury obligations. There is the overhang now of where $1.2 trillion in future committed spending cuts will from and how that will impact the consumer. There are foreign trade deals still held hostage and a $1 billion Boeing plant in South Carolina idled. There are state governments which fear, with good reason, reductions in Federal outlays that had been expected.

As the debt ceiling and budget balancing discussion dominated Congress, progress on other fronts stopped. At a time when the U.S. Congress could have set a positive example to other countries, especially at the moment European ones, it demonstrated almost unprecedented dysfunction.

There is now, I would guess, a 50% chance that we will be back in a recession by January. I sure hope not.


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