Regrettably, we have to lead once again with a report that there is still no deal on raising the debt ceiling.  Things even took a turn for the worse last night when House Speaker Boehner postponed a vote on his bill, reportedly because tea party members didn't feel it went far enough to produce major spending cuts.

In brief, it is apparent that there is a partisan divide within the Republican party that is not to be confused with the partisan divide between Republicans and Democrats.  All of these divides are understandably making the market nervous that a credible compromise that allows for an increase in the debt ceiling and helps avert a downgrade of the credit rating won't be reached before August 2.

Additionally, participants have also been forced to wrestle with the possibility that nothing gets done at all before August 2 as the demands of a loud minority prevent a political coalescence of the majority view that the U.S. cannot get to a point where it can't pay all of its obligations on time.

The impasse in Washington is prompting many participants to take a pass on the equity market altogether.  That has been evident this week, with the S&P 500 down 3.3% entering today's session and slated to extend its losses at the start of trading.

Currently, the S&P futures are 1.0% below fair value, oblivious to better-than-expected earnings results from the likes of Starbucks (SBUX) and Merck (MRK), and focused on three disconcerting factors, namely the unsettled debt ceiling debate, Moody's placing Spain's debt on review for downgrade, and the weaker-than-expected second quarter GDP report.

The S&P futures were down six points ahead of the GDP report, but more than doubled that decline after headlines hit that second quarter GDP rose just 1.3% (Briefing.com consensus +1.7%) on the heels of a downwardly revised and scant 0.4% increase in the first quarter.

(Sidebar: With this report, the BEA released annual revisions to the GDP data going back to 2003; hence, the revision this morning to the "final" Q1 GDP number.  The concise summation of the revisions reported by the BEA is that the recession from 2007-2009 was worse than originally reported.)

With respect to second quarter GDP, the growth scales were tipped higher by positive contributions from exports, nonresidential fixed investment, private inventory investment, and federal government spending that was offset partly by negative contributions from state and local government spending.

Real PCE was up just 0.1% after a 2.1% increase in the first quarter and contributed 0.07 percentage points to the overall change in real GDP.  Real final sales of domestic product, however, were up 1.1% after increasing less than 0.1% in the first quarter.  Real final sales is GDP less the change in inventories.

Separately, the GDP deflator was up 2.3% in the second quarter (Briefing.com consensus +2.0%) on top of an upwardly revised 2.7% (from 2.0%) in the first quarter.

The GDP data are an added reason for Congress to get its act together, as they highlight the prospect of a relatively weak economy slipping back into recession on a policy error of historic proportions.

--Patrick J. O'Hare, Briefing.com

Patrick J. O'Hare is the Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial please email researchsales@briefing.com.