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.

Assuming energy prices behave, inflation should remain contained next year. Look for the Consumer Price Index to increase about 2% from Dec. 2009 to Dec. 2010. With unemployment rising toward 10.5% early next year and staying over 9% through the end of 2010, there will be scant pressure to raise wages and prices. The core rate, which excludes energy and food, should match this year’s increase of about 1.2%. The core is heavily influenced by rents, and with a weak recovery in store, there won’t be much ability to raise the cost of shelter.

For the next few months, inflation may look worse than it is. That’s because energy prices, instead of declining as they usually do in the fall, will remain elevated. And so the seasonal adjustments made by the government inflation watchers will peg monthly increases at around 0.3%. When all is said and done, consumer price inflation from Dec. 2008 to Dec. 2009 should amount to about 2.5%. Were it not for oil prices creeping higher after the steep plunge they took in the last quarter of 2008, inflation would be lower.

A closer look at core inflation is warranted. By eliminating energy and food prices -- typically volatile categories -- from the measurement, the core rate of inflation offers a more accurate reflection of underlying price trends. The core has been increasing 0.1% or 0.2% a month since May, and is up 1.5% over the 12 months through September. It is the core rate that Federal Reserve officials were looking at when they said in their recent policy statement that inflation “will remain subdued for some time.”

In fact, there are some Fed officials who remain alert to the possibility of deflation. They point to rising commodity prices and suggest that there might be a speculative bubble. And they’re not comfortable with the brisk rise in stock prices, which they see as another potential bubble. We think the odds of a deflationary spiral are remote, but concerns will continue as long as the unemployment rate stays around 10%.

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 10%. 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 -- $362 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 2.6% of gross domestic product from 4.8% last year. Imports will register a jaw dropping 27% 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 $460 billion and 3.2% of GDP. Imports will expand by 10%. Exports will grow a mere 6%, thanks largely to sales to China and elsewhere in developing Asia.

Crude oil prices won’t budge much between now and the end of January, selling in the $70 to $80 a barrel range versus $60 to $70 in early fall. But the upward bump has nothing to do with oil supply disruptions or veiled threats by Iranian or Venezuelan leaders to halt exports. In fact, oil supplies are plentiful, while demand for motor fuels remains weak.

Prices are being buoyed by investors betting that a strong and quick recovery will boost demand for fuels to levels last seen in 2007, when the economy was roaring. We think that’s a bad bet to make in the face of an anemic recovery in 2010 that should see U.S. gross domestic product growing by just 2.5%. Still, there’s little chance oil prices will spike toward $100 a barrel. Traders these days are more easily spooked by economic reports that hint at a pause in the recovery.

We expect oil prices to average around $73 per barrel for the second half of this year, up from $52 during the first half. That’ll put the yearly average -- $63 per barrel -- at nearly $40 per barrel less than last year. In 2010, look for oil prices to hover around the $75 mark.

The Organization of the Petroleum Exporting Countries won’t act to prop up oil prices, despite demands by cash pressed Venezuela and Iran for the cartel to cut oil exports. Saudi Arabia fears a quota reduction would boost oil prices to $90 per barrel or higher, choking off the fragile economic recovery, which would dampen fuel demand and cause oil prices to fall.

Gasoline prices will rise by a dime or so to $2.75 a gallon by early January -- counter to the usual trend that sees pump prices easing along with a seasonal motoring decline. Prices are up because refiners are reducing production in the wake of higher crude oil prices that are slicing their profit margins. Diesel fuel prices should inch up 10¢ or so through January, to about $2.90 a gallon.

Look for heating oil prices to climb a bit more, to $2.90 per gallon by January, up 10¢ to 15¢ from today. Natural gas prices will remain a bargain, rising about 10%, to $5 or so per million British thermal units, from December through January. 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 homes and signs that falling prices may soon level off suggest that the long slide in housing is over. Both starts of single family homes and sales should continue to increase a bit, though they’ll slow during the winter as they typically do. A key test will come next spring. That’s when a tax credit for new buyers and some other homeowners is due to expire. Around the same time, the Federal Reserve plans to pull back on policies that are holding 30-year fixed rate mortgages around 5%. By then, housing should be able to improve without federal help.

It will be 2011 before housing returns to a somewhat normal annual sales total of around 6 million. Home sales hit bottom this year, totaling just 5 million. Foreclosure sales will rise to about 2 million next year, dampening home prices. Overall, the national average price will decline about 10% over the next six months, with wide local differences.

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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