Emerging from the summer slowdown

The economy appears to have emerged from its summer soft patch, with the growth of employment and retail sales both accelerating at the start of the fourth quarter. But economic growth is still constrained by the damage done to the balance sheets of households and financial institutions, stemming from the housing bust and the related financial crisis. We expect GDP growth to average no more than 2% over the next couple of years. That means the unemployment rate will remain high and core CPI inflation will continue to fall. (See Chart.) The recent backlash against the Fed's quantitative easing policies may make it harder for it to take further action when, as we suspect, QE2 proves to be ineffective.