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Growth in the second half this year won't match the second quarter's 1.9% increase. The spending boost from the tax rebate checks will fade and consumer spending will be hurt as unemployment continues to rise. Businesses remain wary of spending, and the slump in housing construction will continue into early 2009. Gross domestic product will increase about 1.5% at an annual rate this year and about the same in 2009, even though the drag from housing will begin to subside. Exports won't be as strong next year but will increase, as will federal government spending. And even though net job creation will be negative, consumer spending will get a boost as gasoline prices decline toward $3.50 a gallon by year-end and remain around that level in early 2009.

The Federal Reserve, which began in June to prepare financial markets for a rate increase later this year, now seems inclined to wait until early 2009. The Fed's shift is prompted by the combination of the housing slump and turmoil in the credit markets. Just when conditions seemed to be improving, questions arose about the health of mortgage finance firms Fannie Mae and Freddie Mac. Fed chief Ben Bernanke says officials will remain alert to inflation spreading but that "the normal functioning" of financial markets remains "a top priority." Raising the benchmark fed funds rate from its current 2% would hammer housing and further delay the economy's return to more normal conditions. As for long-term rates, we see the benchmark 10-year Treasury moving up to about 4.25% by year end. The 30-year fixed-rate mortgage should decline a bit but stay slightly more than 6%.

Continuing weakness in housing and manufacturing outside of exports will hurt job growth this year. Job losses are broadening from factories and construction sites to retail stores and financial services firms. Gains in health care and government aren't enough to offset losses elsewhere. Job losses will total about 500,000 this year, following a gain of 1.1 million in 2007. If gasoline prices continue the decline that began in July, spending will expand, and we could see small job gains in the ending months this year. Until then, businesses will remain wary, cutting hours and shifts first and payrolls next. Even as the economy grows, it won't be strong enough to absorb job seekers so that the unemployment rate will rise to around 6.3% early in 2009.

Energy prices are retreating a bit, but still volatile. Oil and gas prices should moderate during the coming months. Still, they will remain high, and with high food prices the overall Consumer Price Index will rise about 4.5% this year, compared with an increase of 4.1% from December 2006 to December 2007. For another month or so, the annual rate is likely to match June's 5% clip. The core CPI, which excludes food and energy prices, is likely to increase around 2.3% this year. That follows a rise last year of 2.4%. Inflation feels worse than the official numbers mostly because prices are going up on goods that consumers have to buy often, such as bread, milk and gasoline. But there are price declines in cars, computers, TVs and clothes. That said, prices of goods and services will increase enough in order to dampen consumer spending and economic growth.

Faint glimmers of a brighter future for housing are on the horizon. Though sales in June fell for both new and existing homes, the monthly declines are getting smaller. Don't look for much of an upturn soon, however, as rising unemployment will hammer the pool of homebuyers. Further, mortgage standards are tighter even as foreclosures rise and add to the inventory of unsold homes. So while sales gradually improve, prices will continue to decline into 2009. The average house price will drop about 5% this year and about 3% next. Declines will be greater -- 10% to 15% -- in areas that saw speculation and overbuilding, including Las Vegas, parts of California and Florida and the suburbs of Washington D.C. Sales of new and existing homes will fall about 10% this year and increase about 5% in 2009. We expect housing starts to bottom by year end and stay virtually flat next year.

We see oil averaging about $100 a barrel in 2009, down the $115 average for this year. Expect prices to continue to seesaw though: Crude oil probably will ease from the $120 per barrel price now to $110 by year's end and run up to $130 or more by next spring. Gasoline use should rise a bit in 2009 compared with this year, when purchases fall by as much as 3.5%. It will be the first decline since 1991, when gas prices jumped as the U.S. entered the Gulf War.

Oil supplies will remain fundamentally tight, and a multitude of supply risks around the world will prevent prices from plunging. Ongoing slow growth or declines in most industrialized nations will likely limit growth in demand for crude to around 1.5% in 2009, in line with this year's 1% growth. An ongoing phase out of fuel subsidies in several Asian nations will help temper demand. Oil supplies will expand at around a 2.5% clip in 2009, year over year. Trends point to an easing of oil prices down the road.

Gasoline should average around $3.40 per gallon in 2009, around 20c a gallon less than this year. For diesel, expect to pay an average $4.15 per gallon, or 15c less than this year. Retail heating oil prices should average $4.15 per gallon, 15 cents less than in 2008, while natural gas will be around $11 per million British thermal units, up 25c. Propane prices should average $2.90 a gallon or so, up 15¢.

Weak U.S. demand will flatten imports in 2008, leading the trade deficit to shrink for the second year in a row. Import growth will drop to nearly zero in 2008, down from 6.1% in 2007, thanks to a combination of dollar weakness and slumping orders for industrial supplies and capital goods. By contrast, exports will grow by 7.2% this year. That's well below last year's 13% but still respectable, particularly given the economic doldrums afflicting Canada, Japan and much of Europe. Asia, excluding Japan, will keep up a relatively brisk pace, if not as fast as in recent years. The weak dollar will continue to help exporters by making U.S. goods more affordable and more competitive on world markets. Overall, this year's trade deficit will total roughly $582 billion and 4.2% of U.S. gross domestic product, the smallest trade gap relative to GDP since 2002.

Retail sales are slowing to a 2% increase in 2008 after a 4% gain in 2007. Consumers spending their economic stimulus checks bolstered second quarter sales, but high gas prices and job woes will limit growth during the back-to-school season to a sluggish 1% or less. One-stop destinations, such as Wal-Mart and Target, will draw more shoppers as consumers cut back on driving. The dreary fall will extend into the holidays, when sales will grow just over 2%. Sales via the Web will continue their torrid increases, climbing 15% in 2008 to around $200 billion and capturing 10% of total retail sales, up from about 9% in 2007. Consumers are increasingly comfortable with buying products online, while many retailers are upgrading their Web sites to attract more buyers.