Growth in the fourth quarter won’t be as brisk as the 3.5% increase in the third. With no cash for clunkers program juicing car sales and an extension of the expiring tax credit for first-time home buyers still up in the air, both car and home sales will slow. Another damper on consumer spending, especially in the first half of 2010: Rising unemployment and scant wage growth.

A lethargic recovery is in the works, progressing at a pace well shy of other economic rebounds. Since the 1940s, during the first 12 months of recovery, GDP growth has increased an average of 6.5%. This time around, it’s likely to be less than half that. Consumers, while showing signs of more willingness to spend, are still weighed down by debt. And businesses will take a wait-and-see attitude toward investment. An abundance of caution means capital spending is likely to post a very small increase. Exports will tick higher, though gains will be limited by spotty growth in overseas economies still struggling to end their own recessions.

One sure engine of growth will be the continuation of spending from the federal stimulus package passed early in 2009, which has been slow to take effect. Help will also come from housing. Construction won’t boom in 2010, but it will provide a modest contribution to growth, which will be a welcome reversal from the past three years.

For calendar year 2010, we expect gross domestic product to rise no more than 3%, more likely about 2.5%, after shrinking by about that same percentage this year.

The Federal Reserve won't raise interest rates until next year, probably summer at the soonest. While the third quarter registered strong growth, the economy is still on unsteady legs after four straight quarters of contraction. The monetary policy gurus don’t want to risk short-circuiting a recovery by hiking rates too soon. They’re especially concerned about unemployment, which is heading toward 10%. With businesses cutting payrolls, the central bank sees no threat of inflation, and so no need to raise the federal funds rate -- the overnight loan rate that banks charge each other -- which remains between 0% and 0.25%.

The task of picking the right time to raise rates is sure to be complicated by the looming midterm elections next year. Lawmakers on Capitol Hill won’t hesitate to take political potshots at Bernanke & Co. if they think the Fed is acting too soon -- or too late.

Fed officials will continue to insist that they remain alert for any sign of inflation, in an effort to reassure jittery bond traders. The Fed doesn’t want the markets to raise expectations of future inflation and send long-term interest rates upward. So look for yields on 10-year Treasuries to inch higher, reaching 4% in early 2010. Next year, look for 4% to be the floor as the economic recovery takes hold and anxiety about the budget deficit resurfaces.

Inflation will remain subdued, despite the August increase of 0.4% in the Consumer Price Index (CPI). About 80% of last month’s jump was due to higher energy prices, which we don’t see continuing. Oil and gasoline prices should remain steady for the rest of this year. Food costs, sometimes a cause for concern, were up only a scant 0.1%. As with energy, we don’t see rising food prices in the coming months. There were increases in rents, airfares, hotel rates and medical costs, but they were offset for the most part by declines in prices of apparel, new cars and other items.

Some observers fret about deflation ahead. They note that the CPI over the past 12 months is down 1.5%. But that sharp decline has been fueled by energy’s return to earth. The price of crude oil, for example, rose to a peak of nearly $150 a barrel in July 2008 and is now hovering around $70. We don’t commodities in another such decline as the global economy returns to decent growth.

For the year, we expect overall prices to increase about 1.5%, measured from December over December of last year. The core rate, which excludes food and energy prices, also will go up about 1.5% this year. The fact is, even with the recession ending, most businesses aren’t able to raise prices.

October’s dismal employment report contains some positive developments. The hiring of temp workers increased by 34,000 -- worth watching because it often signals a turning point in overall hiring. Another signal is the weekly filing of new claims for unemployment benefits -- on a steady decline for two months. Also, while job losses remain high at 190,000 in October, downward revisions to August and September losses “added” 91,000 jobs.

But businesses clearly aren’t hiring, as reflected in the unemployment rate’s jump to 10.2%. That rate will continue to increase, probably to around 10.5% in early 2010. And business managers’ caution in rehiring means that by the end of next year, the rate will still be above 9%. So far during this recession, a total of 7.3 million jobs have disappeared. This year, losses will total around 4.5 million, while 2010 will see a small net gain.

In a vicious cycle, the joblessness of this recovery will hamper economic growth. After the 2001 recession ended, job growth did not resume for two years. This time around, companies will extend hours for existing staff and use overtime as needed to fill orders. In October, the average workweek remained at 33 hours, a record low. Firms will increase hours cautiously, and hiring will be limited until there is more evidence of a broad economic rebound. In some sectors, many high paying jobs will never return.

The trade deficit is on course for its sharpest contraction in 18 years -- $387 billion for 2009, compared with $696 billion in 2008. Relative to the size of the U.S. economy, it will hit its lowest level since 1998, narrowing to 2.7% of gross domestic product from 4.8% last year. Imports will register a jaw-dropping 26% plunge year over year compared with 2008, with exports falling about 19%. But in 2010, as the U.S. leads most of its trading partners in recovery, the trade gap will expand for the first time in four years, to about $500 billion and 3.5% of GDP. Imports will expand by 10%. Exports will grow a mere 5%, thanks largely to sales to China and elsewhere in developing Asia.

Prices for crude oil, motor vehicle and heating fuels will ease up a bit come winter. Bulging oil inventories and the seasonal slacking of driving by consumers and motorists will offset the slightly higher industrial demand as world economies recover.

The Organization of the Petroleum Exporting Countries won’t budge to prop up oil prices, despite demands by cash-pressed Venezuela and Iran for the cartel to cut oil exports. Saudi Arabia will stand pat, fearing a quota reduction would boost oil prices to $80 per barrel or higher, choking off the economic recovery and fuels usage and causing oil prices to plunge.

Look for oil to trade between $55 and $65 per barrel from December to February, down from around $75 now. That assumes there will be no big disruption in oil shipments from Nigeria, Mexico, Venezuela or Iran—and no coordinated intervention by central banks to buoy the dollar, an unlikely scenario. There also are fewer speculators dabbling in the oil markets now than in 2008, when prices skyrocketed. Moreover, traders these days are more easily spooked by economic reports that hint at a pause in the recovery. We expect prices to average around $70 per barrel for the second half of this year, up from $55 during the first half. That’ll put the yearly average at nearly $40 per barrel less than last year.

Gasoline prices will ebb slowly, shedding about 20¢ per gallon by January from the current $2.45 nationwide average. We expect diesel fuel prices to drop 25¢ or so, to $2.40, by December and by another dime during January and February—to about $2.30—the usual low point in diesel fuel demand.

Look for heating oil prices to inch toward $2.60 per gallon by December, down about a dime, and hold at around that level through February. Natural gas prices will remain a bargain, changing little from today’s $4.50 per million British thermal units. Abundant supplies and continued weak industrial demand all but rule out worries about another spike similar to last year’s.

Declines in the inventory of unsold new homes in August and signs that falling prices seem to be near leveling off are recent bright spots, suggesting the long slide in housing is over. There won’t be a surge, however. Sales, starts and prices will still be down for the year. Relatively low mortgage rates, tax credits for new homeowners and falling prices are luring more buyers. But future gains from the tax credit are unclear as it is due to expire Nov. 30, and buyers seem now to be pausing to see whether Congress extends it. Meanwhile, sales of foreclosed homes are brisk in many parts of the country, indicating that buyers are willing to make a deal for a good value. One major problem remains: the labor market. With unemployment continuing to rise, many potential home buyers will be kept on the sidelines, and there will be more foreclosures, keeping pressure on builders.

It will be 2011 before housing returns to a somewhat normal annual sales total of around 6 million. As home sales hit bottom this year, they will total just 5 million. Foreclosures, meanwhile, will continue to increase in 2010, dampening home prices. Overall, the national average price will decline about 10% this year, with wide local differences. Some areas will see a small price drop in 2011.

Consumers will continue to spend cautiously this year. But they will spend, as shown by the monthly retail sales figures for September. The end of the cash for clunkers tax credit resulted in a steep 1.5% drop in overall sales. But excluding autos and gasoline, there was a solid increase, with gains in furniture, clothing and general merchandise, and sales in the second half of this year should be stronger than in the first.

The bottom line: Retail sales for 2009 a bit lower -- less than 1% -- down from the previous year. Consumers will still largely focus on necessities. Positive results and traffic for retailers such as T.J. Maxx and Aéropostale are evidence of consumers’ demand for value. Drugstores, grocery stores, discounters and dollar stores are benefiting, too, but the hunt for a good deal will hurt many other retailers. About 150,000 stores are expected to shut their doors this year.

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