The Twin Threat of Abysmal GDP and Debt Chaos

A weak growth report comes as world markets were looking for contingency plans

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With news that the U.S. economy expanded at its "weakest pace since the recession ended" in the second quarter—the fact that House Speaker John Boehner's debt bill is lying in tatters with four days left to default has doubly spooked economic observers. The Commerce Department said Friday that "gross domestic product rose at an annualized seasonally adjusted rate of 1.3 percent in April through June, while first-quarter growth was revised down sharply to a 0.4 percent rate from the earlier estimate of a 1.9  gain." Here's how the markets and economic observers are reacting:

First, why was growth so weak? New York Times economics reporter and the paper's newly named D.C. bureau chief David Leonhardt tweets "Behind bad GDP #: Sharp slowdown of consumer spending, shrinking of govt. Biz spending actually picked up." The Journal reports that "a big reason behind the downward revision in first-quarter growth was that the inventory buildup by companies was less than initially estimated, while outlays by the federal government and consumers were also revised down."

This is bad! The Atlantic's Megan McArdle retweets Ann Arbor blogger Ron Fisher who quipped "the GDP numbers are like hearing about the Hindenburg on the day the 6 mile meteor hits the earth." Justin Woldfers tweets "There's no longer a puzzle about the jobless recovery. Latest GDP data say it was a recovery-less recovery." The Atlantic's Dan Indiviglio finds the revision of the first quarter a bigger concern than the latest lower-than-expected 1.3 percent number: "revisions to prior quarters' GDP darken the bigger picture. The first quarter, in particular, was just a disaster."

Wall Street's already feeling it, writes John Dobosz at Forbes:

Combined with the continued impasse in Washington over a solution to the debt issues that confront the country, the weaker than expected GDP report is pushing U.S. stocks lower and giving a boost to bonds.   The yield on the 10-year U.S. Treasury note dropped from a close of 2.95% to 2.88% after the release of the data.   Futures on the Dow Jones Industrial Average and the S&P 500 were poised for a lower open, trading down 1.1% at 9:00 a.m.

Banks and investors were already preparing for the worst report Liz Rappaport and Matt Phillips at The Wall Street Journal:

Banks... are scrambling to design emergency plans to avoid a trading logjam in the huge markets for Treasurys and short-term funding facilities if Congress fails to raise the U.S. borrowing limits by next Tuesday's deadline. Money funds are now largely restricting their lending to overnight, preferring the safety of stashing cash in banks, one senior trader said. That is reducing the pool of cash available to corporations, banks and investors. Money funds are also selling asset-backed securities and other debt, the trader said.

Investors pulled $9 billion a day out of money funds this week, according Nomura Securities International Inc. The outflows in the past day could be even higher, traders say. Some $62 billion has left money market funds in the past two weeks, according to the Investment Company Institute.

Corporations are making contingency plans for default, reports Renaa Merle at The Washington Post:

About half of the 302 companies recently surveyed by the Association for Financial Professionals said they were likely to take no action if there is a federal default or downgrade. But that appears to be changing, said Tom Hunt, the association’s director of treasury services. During an online meeting with some members Thursday, about 60 percent said they were holding more cash to hedge against a potential government default, he said. “There is more urgency to hold more liquidity than there was an even a week ago,” Hunt said.

This article is from the archive of our partner The Wire.