GDP growth is expected to be reported in the 3% range for the summer 2009 quarter and nearly that high for the current quarter. Credit the fast start to the ramp up of stimulus plan spending, other new federal spending programs and a sharp reduction in the share of goods orders met from accumulated inventory. Reducing inventory is a subtraction from GDP growth. The July return to increasing factory output substitutes for drawing on the surplus inventory throughout the economy to meet customer orders.

Then, GDP growth is forecast to slip to the 2% range in the first half of 2010 after the initial boost from non-sustainable factors is exhausted. Economic growth will return to the 2.5% plus range in the second half of 2010 and rise to the 3% range in 2011. This is a sluggish recovery. Typically, both the initial growth in a recovery and the follow on growth in recovery years two and three is stronger.

The economy has too many headwinds from the credit market to permit a quick return to the 4% growth range. Economic growth will be constrained in 2010-11 both by the economy wide constraint in the total availability of credit and by the lack of access to credit on affordable terms by an unusually large share of would-be borrowers, both consumer and business, whose balance sheets became less than creditworthy during the long, deep recession.

The credit constraint is gradually easing. Consumers have increased saving to about 5% of income from -2% about a year ago. The corporate profits freefall is over with rising profits expects from mid-2009. Both of these trends will add to lending capital but this will be substantially offset over the next few years by rising credit demand in a growing economy and by the take-back of the 2008-09 liquidity injections into the economy by the Treasury and the Federal Reserve Board (FRB). Several trillion dollars have to be removed to avoid a serious inflation problem in 2011 and beyond. Currently, the FRB is financing more than half of new and refinanced residential mortgages by, in effect, printing money.