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Valliere: Stimulus Delayed as Smooth Obama Transition Turns Choppy


Barack Obama sure picked a bad time to quit smoking. After a near-flawless seven weeks following his election, the president-elect has encountered grumbling within his own party, has been distracted by the Illinois Senate debacle, and faces the likelihood that Israel will be fighting Hamas for weeks to come.

The most serious issue for the financial markets is that his stimulus package — incredibly — is starting to bog down. I and many others thought in December that a massive stimulus would sail through Congress in January, perhaps by Inauguration Day on Jan. 20. That obviously won't happen — and if the markets rallied in December based on hopes of quick action, investors now have something to worry about.

The bottom line is simple: if the stimulus doesn't get enacted until March, as some pessimists now claim, the U.S. economy may not show signs of life until summer, not spring. The prospect of a spring revival, now fading, was driving the stock market in December.

There are several reasons, which we list below, why progress on stimulus has slowed, but I remain hopeful that Congress will appreciate the severity of the economic crisis. That will apparent once again on Friday, when non-farm payrolls may fall another 500,000 after a 533,000 drop in last month's figure. Unemployment, now 6.7 percent, may spike to 7 percent.

Perhaps Friday's jobs report will be a wake-up call for Congress, but even if it does, investors will have to scale back the timetable for a stimulus bill. My sources say the new deadline for completion of a bill is Friday, Feb. 13 — as Congress leaves town for a 10-day break. If action isn't finished by then, this could drag into March.

What happened to the optimistic timetable? Well, this is Congress we're talking about, and the process is always notoriously slow. A stimulus package costing $800 billion or more over two years just doesn't sail quickly through both houses — and in the Senate, the wily Minority Leader, Mitch McConnell (R-Ky.) will drag his feet.

McConnell is the most brilliant tactician Congress has seen in several decades. He will insist on thorough hearings, complete transparency, and painstaking deliberations before the stimulus bill clears the Senate. It obviously will pass, but on McConnell's timetable. And the Democrats' fervor has cooled a bit; Obama's nomination of Leon Panetta as CIA chief has ruffled feathers, and his botched nomination of Bill Richardson as Commerce Secretary has embarrassed the powerful Hispanic bloc.

While I'm suddenly gloomy on the pace of the stimulus bill, it's still very likely that this huge package will pass by late winter with an enormous tax cut, including generous business provisions, and a dramatic infrastructure component, providing jobs in five major areas: repairs of school buildings; a big increase in highway and other transportation spending; expanded broadband in schools; digitalized health records; and energy retrofitting for federal and state buildings.

And there will be money for ailing states, probably via higher Medicaid outlays. An expansion of unemployment, food stamp, and health benefits also will be part of the stimulus package. Importantly for the markets, the package will NOT contain any tax hikes; increases on "the rich" are on the back-burner, probably until 2010.

Much of this stimulus, especially the infrastructure spending, won't have an impact on the economy until summer. The Fed has done its part, with extraordinary (and under-appreciated) measures to boost liquidity, and more TARP spending is coming. But the missing ingredient — fiscal stimulus — will come a little later than I expected, and therefore the timetable for some improvement in the macro-economy may have to be pushed back.

As Obama waits for the economy to show signs of life, he may be forced to spend far more time than he anticipated on the one issue that bedeviled the outgoing president: foreign policy. The Iranian shadow looms menacingly over Israel as Tehran's surrogates in Gaza persist with their terrorism, in a clear attempt to deny Obama an opportunity to let diplomacy work.

As the euphoria of November and December fades and crises mount in January, Obama can be excused for at least chewing Nicorette, if not sneaking an occasional smoke.

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Greg Valliere is the chief strategist at the Stanford Washington Research Group, and was previously Managing Dirctor and Chief Strategist with the Schwab Washington Research Group. He is a regular CNBC contributor.