All indicators point to economic recovery in the US economy. Consumption has picked up, credit is available again, home prices have bottomed, the stock market has recovered lost ground and is rising, banks have regained their stability, and even the securitized debt market has resumed operations. The one nagging problem is employment, but then employment is usually a “lagging” indicator of economic health, which means employment is generaly the last thing to rise in an upswing and the last thing to fall in a downswing.

I would not be surprised to see the Obama economic team taking a second look at his “stimulus package.” The main consideration will be, can we wait for the recovery to slowly improve the employment situation, or do we still need to stimulate demand to induce job creation?

There are politicial reasons for either option. The President has taken a beating over the cost of the stimulus package from both inside and outside his party. He could end the constant barrage of complaints about “reckless spending” based on “runaway deficits.” On the other side he has promised to raise employment. Given the favorable indicators this will eventually happen, but will it come soon enough to satisfy his political base?

Being an old government hand I predict his team will resort to the tried and true response of cutting the program down to satisfy those against it, while keeping major parts of it in place to satisfy those who want employment to rise faster than the normal course of events will allow.

But the parts saved will not reflect their direct effect on employment. Again, in true government fashion the parts saved will be those with the strongest constituencies. I can see the following parts being saved (with rationales):

Energy development. There are too many vested interests geared up to slop at the public trough to finance their projects patronized by the Gods Aeolus and Helios. There is also the passion to sever our dependence on oil from those who finance terrorists.

Road Network. The public is now so worried about the state of the road network in America that Obama would have to take action here, even if there was no need to stimulate employment.

Funds to Local Governments. Too many states and local governments have already factored their take from the stimulus package in their budgets to cut them off now. Obama has to keep these political allies on board.

R&D. Beyond the energy crowd, every Tom, Dick and Harry with a new technology is expecting some gravy from the “stimulus boat.” There will be survivors and losers here. Stem cell research will get funds. But my crystal ball doesn’t show me the others.

So don’t be surprised if major adjustments and changes are made to the Stimulus Package.

Leo Cecchini
June 2009

P.S. When we look back at this sorry mess caused by erroneous valuations of bank held assets we will see that the recovery period began on 2 April 2009. Do you know why?