US gets debt boost, but economic woes grow

 

Stephen Foley
Wednesday 03 August 2011 00:00
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As the US finally sealed its debt-ceiling deal and received the blessing of a major credit-rating agency, any hope of a relief rally in financial markets was snuffed out.

New consumer data showed Americans cut back their spending in June, the first down month since the end of the credit crisis and recession, threatening to take more steam out of an economy that relies on consumer spending for about 70 per cent of GDP.

Less than halfway through the third quarter, major Wall Street banksincluding Goldman Sachs are understood to be reviewing their forecasts for the period, and stock-market traders appeared increasingly gloomy for the fourth quarter and beyond.

The US stock market appeared at lunchtime trading in New York to be heading for its eighth straight negative session, a losing streak not seen since the height of the financial crisis in 2008.

Within minutes of the Senate passing the $2.1 trillion, 10-year deficit-reduction package, rating agency Fitch said the legislation was "commensurate" with the US keeping its vaunted AAA credit rating. "Despite the intensity and theatre of political discourse in the US, there is the political will and capacity to ultimately do the right thing," it said. "The agreement is an important first step but not the end of the process towards a credible plan to reduce the budget deficit to a level that would secure the US's AAA status."

However, unlike its peers Moody's and Standard & Poor's, Fitch had not made any threats to downgrade US debt or change its outlook on the country's credit rating.

Gold and the Swiss franc, safe-haven assets, both hit record highs, but there was buying of US government debt, too. Borrowing costs drifted lower, traders said, not because the risk of a default had been lifted but because it seemed likely the Federal Reserve will now have to keep interest rates suppressed for much longer to deal with the weak economy.

The Harvard University economist Martin Feldstein reiterated his warning that there is a significant chance of a second recession.

Looming government cuts were not the worst of the reasons to be fearful about economic growth, analysts said. The back-end-loaded nature of the spending cuts in the debt deal mean just $25bn will be cut from this year's budget, and not more than twice that next year.

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