WASHINGTON (MarketWatch) -- U.S. companies won't expand their businesses until they are sure the economy will grow, but the economy can't grow unless businesses hire more workers and invest in new capacity, says Ethan Harris, chief North American economist of Bank of America's Merrill Lynch unit and the top economic forecaster in July.
Businesses have begun to reinvest and to hire, cautiously, Harris said in an interview. But "lack of confidence is holding back a full-blown recovery."
Harris and his team at Merrill won the July Forecaster of the Month award from MarketWatch, based on their predictions for 10 top U.S. economic indicators released during the month. He also won the contest in February. See full story on his previous win.
"True recovery requires time and healing," Harris said. Confidence in the economy can't be restored fully until the housing and banking sectors are healthy again.
"In the meantime, we're vulnerable to another shock," he said. "If another shock comes along, we could slide back into recession or very slow growth."
Harris says the U.S. economy will most likely "muddle through" unless we get a new shock to the system.
The main problem is psychology, he said. "People are looking for bad news. They are weighed down by worries," he said.
That's just what happened in 2002 and 2003 when the economy was coming out of the last recession. Businesses were worried about slow growth, terrorism, the war in Iraq and corporate accounting scandals. But suddenly, almost without warning, attitudes brightened in the last half of 2003 and the recovery firmed.
"We're having a replay of the last business cycle," he said. "At some point, say, late next year or early 2012, we'll get a second wind to the recovery," he said. "While we are waiting, the economy is vulnerable to a new shock."
Harris said he's worried about "premature fiscal tightening." He said Congress is "jumping the gun" by trying to cut spending now, before the recovery has taken root. The government's fiscal problems must be addressed, but "it's my view is that it's too early to work down the deficit," he said.
What's needed from Washington is a convincing commitment to address the deficits in the long run without stifling growth now. But that's hard to achieve, in part because of the upcoming election is hardening positions, but also because different factions in Washington have honest disagreements about policy, about how much of a safety net we need, or how much we should be taxed.
In July, Harris and his economic team at Merrill -- Michael Hanson, Neil Dutta and Gary Bigg -- had the most accurate predictions among the 48 forecasters for nonfarm payrolls, new home sales and consumer confidence. Their forecast for the trade deficit was also among the most accurate.
When Harris took over at Merrill last September after a short stay at Barclays Capital and a long tenure at Lehman Bros., he was predicting the U.S. economy would slow in the second half of 2010, from about 3.5% growth at the end of 2009 to about 3% growth by the end of 2010. He got the main themes right, but it now looks like the slowdown will be a little worse than he expected a year ago, maybe 2.5%.
The runners-up in the July contest were Spencer Staples of EconAlpha, Jim O'Sullivan of MF Global, John Silvia's team at Wells Fargo, and Joe LaVorgna of Deutsche Bank.