A cautiously optimistic take on our bipolar economy

August 15, 2013, 11:25 AM UTC

For those of you returning to work after a summer break, here’s an upbeat story about the U.S. economy. Five years after the great financial crisis of 2008, the housing market is recovering strongly, exports have just hit an all-time high, job growth looks decent, and the stock market is enjoying another strong year, reflecting a historic surge in corporate profits. Yippee! But wait a minute. Since spring 2012, the recovery has stumbled badly: GDP growth has averaged less than 1.5% on an annualized basis. Wages remain depressed. And as millions of Americans have dropped out of the labor force, the monthly jobs figures have been seriously distorted. The official unemployment rate is now 7.4%. But if you adjust the figures for the decline in the labor force participation rate, the real rate may be 10% or even higher.

Which portrayal is accurate? They both are. In almost 20 years of writing about the U.S. economy, I’ve rarely seen it send such confusing signals. No wonder Ben Bernanke and his colleagues at the Fed seem a bit confused about what to do. With Congress and the Obama administration about to resume battle over the budget and the debt ceiling, the fog of uncertainty is unlikely to lift soon. But if we peer through the mist, we can catch a glimpse of the larger picture, which shows an economy gradually recovering from an epic boom and bust.

To begin with, household and corporate finances are a lot stronger than they were five or six years ago, when a decade of borrowing had left them greatly extended. Since then Americans have been paying down some debts, defaulting on others, and saving more. Consequently, their debt burden has become less onerous. In the third quarter of 2007 households were spending 14% of their income, on average, servicing mortgages and other loans. Today the figure is below 10.5%. As long as interest rates stay at historically low levels and home prices keep rising, the prospect is for continued growth in consumer spending, which makes up two-thirds of GDP. Businesses, which for years have been sitting on cash, are stepping up capital spending. Between April and June, nonresidential fixed investment grew at an annual rate of almost 5%.

You may not have noticed, but the federal government’s finances have improved too. In 2009 the budget deficit was more than 10% of GDP. This year, according to the Congressional Budget Office, it will be about 4%. With the CBO saying the deficit will fall to just 2.1% of GDP by 2015, the pressure to balance the books is easing; that’s good news for growth. In the first half of this year the rise in the payroll tax and the imposition of the sequester reduced GDP growth by as much as 1%. President Obama has already pivoted from deficit reduction to calling for more government investments. Congress is unlikely to accede to such requests. But the economy will get a boost if it simply refrains from imposing more spending cuts.

Of course, the economy’s prospects also depend on what happens elsewhere. Japan, the world’s third-largest economy, is finally growing again, and even moribund Europe is showing signs of life, so the recent pickup in U.S. exports should continue. Add all those things together, and many analysts, including those at the Fed, expect GDP growth to accelerate to a rate of 3% to 3.5% in 2014. That’s not unreasonable. Lots of slack is left in the labor market, inflation is running well below 2%, and there’s plenty of room for a period of above-trend growth, something we haven’t seen since 2004 and 2005. And above-trend growth is what is sorely needed to bring down unemployment, boost productivity, and raise wages — which, as Henry Ford recognized, are the ultimate source of demand.

To be sure, the upbeat scenario assumes there won’t be any major shocks to the economy, such as renewed turmoil in Europe, a domestic terrorist attack, or a tsunami in the markets as the Fed prepares its exit from quantitative easing. Any of those is possible, although attaching any probability to them is virtually impossible. Still, barring the horrible and unexpected, by next summer the economy should finally have emerged from its bipolar disorder and be looking brighter.

John Cassidy is a Fortune contributor and a New Yorker staff writer.

This story is from the September 2, 2013 issue of Fortune.