It may not be true that the only thing we have to fear is fear itself, but it’s certainly true that lack of confidence is reining in an economy otherwise poised for gains. By Richard DeKaser, Contributing Economist August 23, 2010 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.The recent soft patch in the economy only adds to the insecurity. But it arises mostly from what are temporary woes, rather than persistent problems. The layoffs of short-term 2010 government Census workers in June and July (with more to come this month) have resulted in declines in monthly job figures, despite underlying growth in the number of private sector jobs. The expiration in June of tax credits for home buyers caused sales to crumble this summer, after having spurred a run-up earlier this year. And the European financial crisis reminds all of us that the economic recovery is still vulnerable to a derailing from outside shocks. Most recently, a widening trade deficit has raised eyebrows and elevated concerns. Exports fell sharply in June, while imports soared. The impending July expiration of China’s VAT rebate for exporters probably explains much of the surge in consumer goods shipped to the U.S. that month, while anxiety surrounding the Greek financial crisis prompted businesses both in Europe and elsewhere to defer the purchase of big-ticket U.S. goods. But neither influence will be permanent, and a trend of increases in the neighborhood of 9%-12% for both imports and exports this year and next will reassert itself. 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. Advertisement 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.