As the federal government shuts down its emergency programs, the economy will face big challenges. By Jerome Idaszak, Contributing Editor December 30, 2009 The year 2010 will be one of transition and modest growth for a shaky U.S. economy. Federal aid will carry the economy into the second half of the year as it struggles to overcome lingering challenges. “For a while, unemployment will go up; credit markets are not fully healed and commercial real estate has problems,” says John Silvia, chief economist with Wells Fargo Securities.The government will begin to carefully withdraw after pulling the economy back from the brink and spurring a recovery through massive intervention. Expect a very different landscape a year from now. Government will still be an active player, but look for the economy to stand more on its own. Gone will be many of the emergency props put in place when fears of a depression reigned. Taking their place: More federal regulation, as Congress and the administration increase oversight in hopes of preventing another financial crisis. We expect tepid growth, but no double dip: a 3% gain in GDP for 2010 with a net gain of 1 million jobs. That will be a welcome change after two years of job losses, but the payroll gains will still leave the unemployment rate at close to 10%. “Recoveries from a financial crisis are slow,” says Nigel Gault, chief U.S. economist with IHS Global Insight. Advertisement On the plus side, consumers will spend about 2% more in 2010, after cutting back by about 0.7% in a dismal 2009. Retail sales will gain a modest 3%. Exports are set to rise as foreign economies, especially in Asia and Latin America, keep growing. Those two developments will prompt firms to restock inventories. Housing will also boost GDP a tad after dragging it down a percentage point in each of the last three years. Look for housing starts to total 750,000 this year, up from 600,000 in 2009 but well below the pace seen during much of the 1990s of about 1.5 million annually. Count on inflation staying in check at about 2%, assuming no big oil supply disruptions. And there are signs that venture capital firms are ready to aid start-ups. Venture capital virtually dried up last year, but several big deals are reportedly in the works. Advertisement But, as the economy picks up and government pulls back, big challenges threaten a sustained recovery. The federal stimulus won’t be nearly as large, especially spending on infrastructure. Parts of the two-year, $787-billion stimulus program will continue to help some, but temporary boosts...tax breaks for home buyers, extended jobless benefits, subsidies that keep mortgage rates low, extra food stamps and COBRA subsidies, to name a few…are set to expire in 2010. Another, cash for clunkers, is already gone. State governments will cut back, too, as they struggle with budget shortfalls that already total more than $25 billion. Deficit spending isn’t an option for them. Direct aid in the stimulus bill helped states limit layoffs, and more federal help -- up to $30 billion -- is likely soon, but it won’t be enough to avoid significant state austerity measures. Martin Regalia, chief economist with the U.S. Chamber of Commerce, says, “Uncertainty is still palpable.” And in an uncertain climate, businesses won’t rush to spend, especially on new plants or office space. Small business owners who depend on loans from banks are having trouble getting money. As a result, relatively few…16%...say they plan any capital spending during the next six months. We expect overall investment to be flat for the year, although firms will spend about 3% more to meet pent-up demand for software and equipment.