With the banking system still struggling with toxic debt on its balance sheets and the corporate sector still reluctant to invest, the economic recovery – especially job growth – will continue at a much slower rate than many think.

Previous sharp recoveries were accompanied by a strong recovery in jobs – one that is notably absent at present, as investment spending, a leading indicator of job growth, continues to be weak.

Consumers, burdened by prolonged unemployment, seem to open their wallets only when price incentives or outright gifts, such as “cash for clunkers,” are thrown at them. But government spending will only add to our mounting national debt and cannot possibly lead to substantial job growth, as corporate spending is the only solution.

Businesses – large and small – are continuing to play it safe because investing is a risky journey. Companies are extremely concerned that their new investments do not guarantee future sales. This lack of an effective demand signal is a major stumbling block to recovery.

Notwithstanding the administration’s mandate to lend more, banks simply lack the collective ability to do so because of toxic debt on their balance sheets. I feel that this country will not go the way of Japan, which experienced 10 years of zero growth.

Unlike the United States, Japan did not have foreign investors buying its toxic debt, resulting in “zombie” banks that were unable to support the corporate sector’s investment plans. The faster we clean up these bad banks, the faster we can get back on track with respect to growth. However, this will still be a long process.

The latest GDP report provides a glimmer of hope, with tech spending increasing by a strong 13.3 percent in the fourth quarter of 2009 compared to the previous quarter’s increase of 1.5 percent. But the hole is a lot deeper if you look at it in historical context. Tech investment levels have dropped more than 20 percent since their peak in late 2007.

Georgia and Atlanta: Banking Woes Impede Job Recovery

Marked by significant job losses, a double-digit drop in tax collections over the last 12 months and an upward trend in foreclosures, Georgia’s economy continues to struggle to find the necessary momentum for a full economic recovery. Toxic debt in the banking system continues to impede the planned expansion desires of companies, particularly small businesses.

The overhang of toxic debt has caused banks to be very cautious in making new loans. In addition to the more than three dozen Georgia banks that have failed since 2007, two-thirds of the surviving banks in Georgia have some sort of cease-and-desist order against them. Construction activity and small business start-ups are major casualties of this toxic debt.

Consumer reluctance to spend and unpopular initiatives out of Congress are among the factors causing businesses to back away from plans to invest and expand. In the early 2000s approximately 50,000 people annually moved to Georgia from neighboring states. This reinforced the economy by creating a multiplier effect that led to the establishment of new businesses, services and buildings to support this growing population base. Now the situation has reversed. The market cues are all focused on contraction. Clearly revenue collections (especially sales tax collections) continue to fall significantly at the state level.

In addition to construction, the other traditional sectors of growth – air transportation and telecom – also are in a retrenchment. The healthcare sector will grow but be restrained somewhat while it watches for cues from Washington. Education and state and local government, also drivers of job growth, will continue to suffer from lack of tax revenue.

Rajeev Dhawan is director of the Economic Forecasting Center. Dhawan publishes quarterly economic forecasts for the United States and for Georgia and Atlanta at the center’s conferences. He holds a master of economics degree from the Delhi School of Economics at Delhi University in India and a Ph.D. in economics from the University of California – Los Angeles (UCLA).