The impact of the agreement on the economy next year "is going to be small, maybe a few tenths of a percentage point," as most of the cuts are put off to the future, said Michael Feroli, chief U.S. economist for JPMorgan in New York.
The turnabout in the long-term budgetary stance also puts pressure on Federal Reserve Chairman Ben S. Bernanke and his central bank colleagues to keep monetary policy easier for longer to offset the economic effects from the tighter fiscal outlook.
"The more fiscal drag there is, the less of a case there is for monetary tightening," said James O'Sullivan, chief economist for MF Global in New York. He predicts the Fed will keep interest rates at record low near zero and its balance sheet near a record high of $2.87 trillion through this year and into 2012.
Job-creation efforts already have been hampered by cutbacks in the public sector. Since May 2010, total government employment has dropped by 916,000 jobs, according to Labor Department data.
Stocks Fall
U.S. stock prices bounded ahead in early trading yesterday on news of the budget deal, only to fall back later on fresh signs of economic weakness. The Standard & Poor's 500 Index ended 0.4 percent lower at 1,286.94 for a sixth straight daily loss. European stocks fell to the lowest level in almost 10 months today amid concern that a U.S. slowdown is derailing global growth.
The 10-year Treasury yield fell four basis points to 2.71 percent as of 10:05 a.m. in London, after touching 2.69 percent, the least since November.
The Institute for Supply Management reported yesterday that its factory index slumped to 50.9 in July, the lowest level in two years, from 55.3 a month earlier. A reading below 50 in the Tempe, Arizona-based group's index signals the manufacturing industry is contracting.
Uncertainty Resolved
Federal Reserve Bank of St. Louis President James Bullard voiced hopes last week that a resolution of the debt-ceiling impasse may remove an unknown that has restrained growth.