The recovery from the Great Recession is faltering. Gross domestic product grew only 1.5% in the past year. It grew at an even slower pace in the first six months of 2011. Unemployment remains above 9%, where it’s been most months since mid-2009. Rising oil, food, and medical prices helped increase inflation to 3.6% over the past 12 months. Federal policy has been deadlocked. 

Unfortunately, the economy looks to be headed for more of the same over the next year. Consumers are exceptionally gloomy. The Index of Consumer Sentiment has dropped back toward recession levels. 

High unemployment, falling home prices, and financial market uncertainty are weighing consumers down. 

Consumer spending has grown only slowly. 

Investment in business equipment has grown, and data on new orders indicate that growth will continue. Business building investment may have reached a turning point as well. But the housing market still hinders recovery. Building permits for new homes did not increase over the past year, and housing construction remains near record lows. Home prices continue to fall. Business investment may be a plus in 2012, but housing will continue to hold the economy back. 

Despite huge federal government deficits and rising debt, the government sector also has been a drag on economic growth. The federal stimulus programs have mostly run out. State and local governments have been laying-off employees and raising taxes. Tax cuts and added spending from the proposed jobs plan would help some, if it could pass, but overall government spending is likely to add little to growth in 2012. 

Both exports and imports are rising, which means the trade sector is not contributing very much to growth. The value of the dollar has fallen steadily against China’s yuan, which may help with our exports to China eventually. The dollar is up and down against the euro, depending on the news about European debt troubles. Economies around the world are slowing, however. Trade will only make a small contribution to positive growth over the next year. 

With lagging consumer spending, housing investment, and government purchases, and only small boosts from business investment and trade, expect GDP to grow only 1.5% to 2.0% above inflation over the next year. Such growth is too slow to foster an improving economic picture. 

GDP growth near 3% is usually required to hold the unemployment rate steady. Less than that, and unemployment tends to rise. Slow growth will mean no progress on unemployment, with the unemployment rate remaining 9.0% or moving higher by this time next year. 

High unemployment usually means falling inflation unless oil prices rise. That’s what happened in 2010-11. Oil prices have dropped some in the past few months, and Libyan oil may begin to flow again. Barring another oil price hike, the inflation rate should fall. Expect inflation of 1.5% to 2.5% over the next 12 months. 

Predicting interest rates should be easy. The Federal Reserve has pledged to keep the federal funds interest rate near zero until mid-2013, where it’s been since the end of 2008. The rate on 10-year Treasury bonds has dropped as investors seek refuge from market volatility and the FED has decided to buy more long-term bonds. Interest rates will remain low. Expect the interest rate on 3-month Treasury bills to be 0.2% and the interest rate on 10-year Treasury bonds to remain under 2.5% a year from now. 

It’s an uneasy forecast at best, with threats may be nearly as large as opportunities.