Economics: Worries About Tomorrow Hold Back Economic Growth Today

The missing element in this recovery is confidence. Lacking a clear picture of what's ahead, business managers are reluctant to commit to new hires, to build, buy or lease more space and to beef up inventories. Average consumers are loath to open their wallets for much more than necessities. And investors startle and sell at every negative bit of news.

Most other components needed for growth are there -- in spades. In fact, there's enough dry tinder around to suggest that when businesses and consumers do feel secure enough to loosen the purse strings, the resulting upswing could spread like wildfire.

Big banks have oodles of funds to lend to qualified buyers. Thanks to shrinking loan losses combined with strong earnings, they have rebuilt their capital base to a record level. Big corporations are rolling in cash they can spend: $275 billion in excess liquidity as of the first quarter. What's more, profits for S&P 500 companies were up 46% from second quarter 2009 to second quarter 2010.

Postrecession productivity gains must eventually give way to hiring -- employers simply can't continue to wring more out of the workers they already have. At some point, they will hit a wall, and when they do, businesses have the money to hire. And consumers are getting their budgets in order. Nineteen percent of household income went to servicing financial obligations in 2007. Today, that share is 17%, the lowest since 1998.

In addition, government policies remain supportive. Most of the spending slated for infrastructure under the 2009 stimulus package is still in the works, and the Federal Reserve is keeping its foot on the accelerator. Interest rates are sure to remain at rock bottom for a long time, and the Fed stands ready to buy Treasuries if needed to pump even more cash to banks and encourage a freer hand with credit.

With time -- probably a matter of months -- the fear and uncertainty will fade, and a pattern of stronger growth will reemerge. Meanwhile, it's a nerve-racking waiting game.

For more, see Worries About Tomorrow Hold Back Economic Growth Today by Richard Dekaser, August 23, 2010, at Kiplinger.