Washington Failed to Avert the Sequestration – 3/1/13

The spotlight this week was on Washington and the sequestration that is set to go into effect today.   Since Democrats and Republicans failed to reach an agreement, $85 billion in across the board spending cuts will be implemented by the end of the year.  However, the full implementation of these spending cuts will not be realized for at least a few weeks, giving both sides more time to strike a compromise.  This is further proof of the fragmentation in Washington and evidence that both sides seem to be more polarized as we careen through another manufactured political crisis. 

The next political showdown will occur later this month as Republicans and Democrats will have to vote on a continuing resolution to avert a government shutdown on March 27th.  Politicians used the threat of a government shutdown last year to get their political agendas passed and we expect to see similar strategies levied over the next few weeks.  Both President Obama and House Speaker John Boehner suggested that they would not hold funding of the government hostage to negotiations over the sequester.  However, we expect the political drama to continue over the next several weeks with another eleventh hour resolution passed to ultimately avoid a full government shutdown.  It appears that financial markets are becoming more immune to the political dysfunction in Washington based on the response seen this week.  The threats and fear mongering staged by policy makers are no longer credible and financial markets have shifted their focus to economic indicators rather than political bantering.

U.S. Manufacturing Expands

Momentum appears to be building in U.S. manufacturing as factories continue to boost production.  Manufacturing in the U.S. expanded this February at the strongest pace since June 2011.  This is an encouraging indicator and illustrates that the pent up demand is finally showing up after being restrained by the year end fiscal cliff fiasco.  We are starting to see businesses invest in new equipment as orders for capital goods, excluding military gear and aircraft, have climbed 9.5% since October.  Meanwhile, data outside the U.S. showed that China’s manufacturing slowed for a second month and that the Euro area contracted for the 19th straight month.

Consumer spending also expanded in January supported by strong vehicle sales in the U.S.  Cars and light trucks sold at a 15.2 million annual rate in January after 15.3 million a month rate earlier.  November thru January was the strongest three months in the auto industry in the last five years.  Many economists were expecting to see consumer spending decrease due to the expiration of the payroll tax holiday, but consumer spending has remained relatively strong, further evidence of an improving economy.