The market was up pretty strongly prior to the open due to the debt deal but has sold off significantly after the open. One main reason is that the manufacturing ISM data came in at 50.9 vs 54. This still shows expansion in the manufacturing sector(anything above 42.5 is considered expansion in manufacturing from the prior month) but it has slowed down significantly.
Even before the ISM data release the market had given up almost all the gains from Friday’s close. Although the President and party leaders have agreed, I think there is still a reasonable chance the deal may not go through. Although there are no revenue increases, it doesn’t look like the cuts are large enough for Tea Party members and many democrats are not going to be pleased about no revenue increases.
Here are the key points of the debt deal
- The president can authorize the debt limit to increase by 2.1 trillion which should be good to take us into 2013.
- Immediate cuts of $900 Billion over 10 years have been identified
- A bipartisan committee of 12 members equally divided between democrats and republicans will give suggestions for reducing the deficit by another 1.5 trillion over 10 years. The suggestion can be a mix of cuts and revenue increases.
- If the committee’s suggestions are not adopted then there are triggers for forced spending cuts of $1.2 trillion. The forced $1.2 trillion cuts will be divided 50/50 over defense and rest of discretionary spending.
- Pretty much all social welfare programs like medicare, medicaid and social security are protected from the $1.2 trillion forced spending cuts.
I think the plus points for President Obama and the Democrats are that they got a large debt limit increase and they have protected most of the social welfare programs from cuts. The loss for the democrats is that they are not guaranteed any revenue increases. The plus point for the republicans is that they will give none to very little in revenue increases. The negatives for the republicans are that defense may get hit hard if they don’t agree to revenue increases and there is no entitlement reform.
From my perspective, I do think the large increase in the debt limit is good as we don’t want to go through this kind of circus too frequently. I would have also liked some higher revenues by closing loopholes and simplifying the tax code. I would have preferred more cuts coming from Medicare as that is really the biggest long term drag on our budget. The non-defense discretionary spending part of the budget will see deep cuts and that part of the budget actually contains some of the true investments the government makes like education, scientific research funding and infrastructure spending. So we are making huge cuts on the investments side of our spending but not cutting much on the non-productive spending like Medicare. These kind of spending cuts are not good for our long term economic growth.