I posted the July Recap on our blog yesterday, but also I wanted to share some thoughts on the debt deal.

The agreement contains $917 billion of spending cuts over the next decade and allows for an immediate $900 billion increase in the debt ceiling.   Then, a congressional committee must find another $1.2 trillion in deficit savings by late November to enact by December 25 in order for President Obama to boost the debt ceiling another $1.2 trillion.  If Congress fails to meet that deadline, then President Obama can still obtain a $1.2 trillion increase in the debt ceiling, but automatic spending cuts would go into effect across the government from defense to Medicare starting in 2013.

Politicians decided to punt on many of the difficult decisions that need to be made; they are reluctant to cut the deficit too quickly for fear of sending the economy into a recession before the 2012 elections.  Although the immediate impact from the debt deal is likely to be small – only $21 billion and $42 billion reductions in government outlays over the next two fiscal years is hardly enough to move the needle on a $15 trillion economy – the fiscal austerity comes as several other stimulus programs are set to expire including the temporary 2% payroll tax cut, extended unemployment benefits, and the $830 billion stimulus package signed into law more than two years ago.

With the fiscal stimulus coming off the table, the onus is on the Federal Reserve to keep the U.S. economy afloat, which means monetary policy may not tighten until 2013.  The last time the Fed maintained such prolonged monetary support for the economy was during the late 1930s and 1940s. That time, we were fighting a war.  This time, it’s all the economy.

One of my favorite columnists wrote in his column this week that “economic policy in the developed world over the past 25 years has followed one overriding principle: the avoidance of recession at all costs.”  The problem now is that the Fed, like the government, may be out of meaningful ammunition.

Today stocks are lower again as investors shift their attention from the debt deal to weakening economic data, including today’s 0.2% decrease in consumer spending and yesterday’s ISM release showing manufacturing sank to a two-year low.  In addition, revised U.S. GDP data released on Friday showed that the economy lost momentum throughout 2010 and basically stalled in the first three months of 2011.

The labor data this week ought to be a key catalyst for the near-term direction of the market.  Be sure to subscribe to our RSS feed on our blog www.acrinv.com/blog for daily coverage of the prior day’s market activity as well as detailed analysis and opinions about the current economic data releases.

Peter Lazaroff, Investment Analyst

St. Louis, MO