Aug. 1, 2011 -- U.S. financial markets, at first buoyed by the news of a possible debt limit deal in Washington, slid after a report on manufacturing showed weak progress for the economy.
President Obama and House Majority Leader John Boehner, R-Ohio, announced an agreement to raise the debt ceiling and avoid a default on U.S. debt last night. That sent overseas and US stocks sharply higher.
But the momentum fell apart after the Institute for Supply Management (ISM) issued its monthly index, showing a tepid manufacturing sector. Economists consider the index an important indicator in predicting the manufacturing portion of the economy, said Phil Orlando, chief equity strategist with Federated Investors.
The Dow Jones Industrial Average fell almost 11 points at the close to 12,132.5.
"The ISM number was a game changer because we thought the economy would start to firm in the later summer months, especially as Japan starts to come back," Orlando said.
The ISM index for July fell to 50.9 , which was below the consensus figure of 54.5 and June's actual number of 55.3.
"It was significantly below what the consensus expectation was, even though the street thought the number would be soft," Orlando said.
Bruce McCain, chief investment strategist with Key Private Bank, said the report does not eliminate the possibility of an anticipated improvement in the economy in the third quarter.
"It be more back ended loaded in third quarter than anticipated," McCain said. "We've seen some recent retail numbers that show consumer spending may be improving, which shows more potential improvement for GDP growth. We think it's too early to conclude improvement is not coming."
Today's manufacturing report followed a weaker-than-expected gross domestic product figure last week. On Friday, the U.S. government said the economy expanded at a disappointing 1.3 percent annual rate in the second quarter after barely growing during the first quarter.
"To be as weak as it was, it gave economists pause in conjunction with the weak economic figure on Friday," Orlando said. "It's just another piece of the mosaic."
Orlando said investors may also still be concerned S&P or Moody's could downgrade U.S. credit despite a possible deal to avert a default.
"We don't know if the votes tonight will be successful," Orlando said of the plan in the House and Senate today. "We don't know about the political horse trading or the language of these bills. There's the risk that the agencies will look at the final version and say, 'It's nice you did this but it's not enough.'"
Before the U.S. markets opened, Asian markets had also rallied with the news that Washington may finally have a deal to avert a debt crisis. But for China, the U.S.'s largest creditor, it has been a nail-biting wait and while a doomsday scenario default has likely been avoided, many are asking whether the damage already has been done.
"The short answer is yes," Steven Xu, the director of the Economist Intelligence Unit in China, told ABC News. "Given the unique status of U.S. dollar as the world's currency, it has been particularly disappointing to witness these [political] theatrics in the US. The government doesn't seem to even want to try in terms of belt-tightening. So that's particularly disappointing from China's perspective. And of course given the fact that China is biggest holder of U.S. treasuries, China has most to lose."
So far Chinese authorities here have not made any official comments about the debt stand-off, but Beijing has repeatedly urged Washington to protect its investments, which are estimated to account for roughly 70 percent of China's $3.2 trillion in foreign exchange reserves.
Clarissa Ward contributed to this story