8-02-11 by LGR Financial News Staff

As leaders in Washington conclude their debt-ceiling political kabuki  averting the potential economic disaster that would have come with the US government defaulting on its loan payment, the Dow Jones industrial average fell more than 150 points Tuesday, as investors worried that the debt-ceiling agreement could further weaken an already sluggish economy and plunge the economy into a recession.

The Dow was off  265.87 points, or 2.2%, to 11866.62.

Foreign stock markets sold off heavily, with the Spanish and German markets sinking more than 2%.

The Standard & Poor’s 500-stock index shed 21 points, or 1.6%, to 1266, led lower by industrial and consumer-discretionary stocks. All 10 sectors in the S&P 500 traded in negative territory, leaving  the S&P 500  at a 2011 closing low.

The technology-oriented Nasdaq Composite gave up 46 points, or 1.7%, to 2698.

Treasury bonds continued their startling three-day rally. The yield on the benchmark 10-year Treasury note plunged to a nine-month low of 2.62% from 2.75% on Monday.

New reports showing U.S. manufacturing grew at its slowest pace in two years in July, now have Wall Street’s attention focused on indications of a global growth slowdown that is reviving fears of recession.

Investors scrambled into gold and U.S. Treasury bonds, perceived havens, as talk on Wall Street turned to whether the economy might be headed back into recession.

Today’s selling was driven by a government report that showed consumer spending suffering its worst decline in June since September 2009 as consumer spending fell 0.2%, compared with the 0.1% increase that economists expected.

Combined with a related rise in personal savings, the economic news indicated that the American public, barraged with pervasive warnings about the debt ceiling and reeling from chronic unemployment, are further cutting back on their discretionary spending.

On Monday, the Institute for Supply Management said its index of national factory activity fell to 50.9, the lowest level since July 2009, from 55.3 in June.

Economists had expected a reading of 54.9, a reading below 50 indicates a contraction in manufacturing. As new orders contracted, doubt in being cast on expectations the faltering recovery would quickly regain steam.

Additionally, a report last week showed that gross domestic product only grew at an annual rate of 1.3 percent in the second quarter of the year following 0.4 percent in the first three months, prompting economists to warn of possible relapse into recession.

The results of Gallup’s Job Creation Index also show poor job creation numbers throughout most of the country.  Hiring has remained virtually flat over the past six months, and employers appear to be holding back on their hiring indicating that many companies may be concerned about how much business they expect to get in the future, That report, as well, has investors running for cover.