Stocks have declined for seven straight days to August 1, despite the debt resolution approved by the Senate and White House that’s waiting to be passed by the House of Reps. There was no doubt in my mind and the thinking of many others that it would be approved. Even so, the resolution does not mean Americais home-free. Actually, it’s more like we’re in the land of debt. The deal calls for a $2.1-trillion increase in the debt ceiling to around $16.4 trillion, which will allow the country to pay its debt obligations and spend.
But just the idea of adding to a massive debt load makes me shiver, thinking of the mounting interest and debt obligations. And, even worse; could you imagine the hardship when interest rates turn higher? It’s not going to be pretty and will continue to be a burden on the American taxpayer.
For the agreement to pass, both sides agreed to spending cuts of about $2.4 trillion. That is pretty good, but the fact that it will take 10 years is worrisome. The cuts are expected to come from defense and general cuts to programs and other current spending.
Right away, my economic analysis indicates a red flag. For the cuts and debt to be lower, everything must work out perfectly, but the reality is that there are glitches that will impact the process.
And don’t forget the debt issues in Europe that could worsen are still around.
The Obama administration and those following will continue to face many hardships. The government needs to increase the revenue side of the column in order to make its cuts less dampening on the wellness of the country’s citizens.
Major revenue consists of income taxes, but the current jobs market is weak. Watch for the key non-farm payrolls on Friday. After a disappointing June when the unemployment rate edged higher to 9.2% and a mere 18,000 jobs were generated, investors are anxious to see better numbers. Economists estimate that the unemployment rate will decline to 9.1%, with 78,000 new jobs created. Before the non-farm payrolls, watch for Challenger Job Cuts and ADP Employment Change on Wednesday.
The problem is that if the jobs readings disappoint, we could see more sellers run for the exits this week. HSBC Holdings plc (NYSE/HBC) just announced it would lay off 30,000 employees worldwide—not a good situation. Barclays PLC (NYSE/BCS) is joining in with the firings and is cutting 3,000 jobs. The cuts do not paint a rosy jobs picture.
Also troublesome is a decline in personal spending in June by 0.2% versus a 0.1% increase in May. This indicates a lack of confidence in the jobs market and economy. Moreover, personal incomes edged up a mere 0.1%, down from 0.2% in May. The combination of flat income and lower spending, along with the weak jobs market, will impact GDP growth.
And this will impact the economy and President Obama’s plans.