Wednesday, July 20, 2011

Economy After The Debt Ceiling Debate Concludes

It is nearly impossible to turn to any business or news program where the lead story is anything but commentary on the debt ceiling debate going on in Congress. As we noted in our 2nd Quarter Investor Letter published on Monday, the real issue is not simply raising the debt ceiling, rather the growth in the debt itself.

As the below chart shows, Congress has the unique ability to increase the Federal debt (spend beyond its means) every time the ceiling is raised. The more significant issue facing the government is developing a plan that reduces the government's overall debt.

From The Blog of HORAN Capital Advisors

At HORAN Capital Advisors we do believe the debt ceiling will be increased and if it occurs after the August 2nd deadline, the delay will not have a negative long term impact on the economy. A key will be whether spending reductions are incorporated into any debt ceiling increase that passes Congress.

From an economic perspective, we noted in our recent newsletter that the steepness of the yield curve and bank lending are suggesting a better economic environment ahead. As the below charts detail, the 13-week rate of change in loans and leases at commercial banks has turned positive, i.e., above zero, for the first time since January 2009.

From The Blog of HORAN Capital Advisors

Additionally, the below chart shows the steepness of the yield curve (fed funds versus 10 year treasury). This spread is near a record high and historically recessions have been 3+ years into the future; hence, a double dip recession does not seem to be just around the corner.

From The Blog of HORAN Capital Advisors
Chart source: Charles Schwab

Lastly, recent earnings announcements have been coming in on the strong side as 75%+ of companies that have reported have exceeded expectations.

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