The pace of recovery picked up a bit in the third quarter indicating that we are not going to double dip into recession. But the latest economic data suggest that the economic recovery remains tepid at best.

Real GDP grew at an annual rate of 2.5% in the third quarter of this year, after growing only 1.3% in the second quarter. Since the end of the recession in June 2009, the economy has grown at a 2.5% annualized pace. Incoming data are consistent with moderate growth through the remainder of 2011 and into the new year. We expect GDP to gradually rise to just over 2.5% by the end of next year.

Our forecast is based on continued modest personal consumption spending, moderate business investment, and gradual improvement in housing. High and rising debt levels will result in continued fiscal retrenchment at all levels of government. Finally, the level of imports is expected to pick up, dampening some of the benefits we’ve experienced as the trade deficit narrowed.

The largest contribution to the growth in third-quarter GDP was the resurgence of the consumer. Real personal consumption expenditures grew at a 2.4% annual rate in the third quarter of 2011, following an increase of 0.7% in the second quarter and 2.1% at the start of the year. These gains were driven by modest increases in disposable income and wealth; however, significantly stronger job growth will be necessary to see continued improvement in this area.

The housing market, which is a major component of household wealth, remains very weak, and there is considerable month-to-month variation. In September, housing starts rose 15.0% after falling 7.0% in August. Existing home sales fell 3.0% in September following an 8.4% increase in August. New home sales rose 5.7% in September following a modest 0.3% decline in the prior month. We expect continued volatility but modest improvement going forward.

Business Investment and Trade

Business investment remains strong and was a significant driver of third-quarter GDP growth. Equipment and software investment increased at an annual rate of 17.4% in the third quarter after growing 6.2% in the second quarter. We expect investment in equipment and software to slow to an average of about 8.0% over the next year.

Several subcomponents of investment suggest that we will see continued growth, although at a slower pace. Trucking and rail shipments serve as important barometers of the state of the economy. The American Trucking Associations Truck Tonnage Index has recovered since the depths of the recession, but it has been moving sideways all year. This is consistent with the slower pace of growth we have experienced this year relative to 2010.

Rail carloadings have been on an uptrend since the end of the recession and have fared a little better this year. While growth has picked up, these indicators remain below their prerecession levels.

After an unprecedented drop in demand, production of boxboard has picked up again, reflecting stronger demand and modest improvement in the economy. Taken together, these indicators are pointing to continued growth, albeit at a modest pace.

As the dollar has once again weakened, the trade deficit narrowed in the third quarter. Exports increased at a 4.0% annual rate after growing 3.6% in the second quarter. But imports were substantially weaker as domestic demand and the weaker dollar combined to depress demand for foreign goods. As a result, imports rose 1.9% after increasing 1.4% in the second quarter. With a weak euro providing some dollar strength, we expect imports to recover and net exports to deteriorate a little in future quarters.

The Labor Market

The labor market continues to add jobs but at a disappointing pace. The underlying employment data indicate that the economy is gradually improving and not slipping into a double-dip recession. Once again, growth isn’t fast enough to put people back to work.

We lost just over 8.5 million jobs during the downturn. And while the economy has produced almost 1.3 million net new jobs in 2011, we still need to add about 6.5 million jobs to get back to prerecession levels. The most recent data are not encouraging. Total payroll employment increased by 80,000 in October after growing by 158,000 in September. At the current pace, job creation is barely keeping up with the influx of new job seekers into the workforce. As a result, we’re looking at sluggish growth, modest job creation, and stubbornly high unemployment for the foreseeable future.

Claims for unemployment insurance reinforce this point. Claims remain volatile and are hovering right around 400,000 new claims per week, which is high by historical standards. One bright point in the latest employment report is that the unemployment rate declined for the first time in months, although at 9.0% the labor market is far from healthy.

Furthermore, the current unemployment rate likely understates the true slack in the labor market. In addition to the unemployed, about 2.5 million people are marginally attached to the workforce. Also, about 8.9 million people are working part time even though they would prefer working full time.

Not only are there millions of people unemployed, but the duration of unemployment is well above what we saw during the previous recession. The average duration is currently 39.4 weeks; the median, 20.8. Of the unemployed, more than 40% have been out of work for more than 27 weeks. In other words, the job losses appear to be more permanent.

Monetary Policy and Inflation

To compound the problems in the labor market, a sharp increase in commodity prices led to noticeable inflationary pressure over the first half of the year. These pressures have eased, and the near term forecast is more benign. In September, the consumer price index rose 0.3% and was up 3.9% over the past year. Core prices, net of energy and food prices, rose 0.1% in September and 2.0% over the last year.

Low and stable prices at this point leave the Fed plenty of room to pursue additional monetary easing if it decides it’s necessary. Over the past three years, the consumer price index has risen at an annualized rate of only 1.2% and inflation expectations are muted. One measure from the Cleveland Fed anticipates inflation of only 1.4% over the next 10 years. Prior to the recession, this measure hovered right around 2.0%. While increases in oil and gas prices have particularly pernicious effects, broad-based increases in prices generally reflect rising demand. Given the dismal state of our economy, the expectation of a modest uptick in inflation would be a positive development because it would incentivize households to increase consumption.

Federal Reserve Chairman Ben Bernanke has indicated his willingness to take further action, and the FOMC (Federal Open Market Committee) has been actively debating a variety of policy proposals. While full details have not yet emerged, many private forecasters now expect another round of quantitative easing to be announced by the end of this year or early next year. Regardless of Fed activity, we expect the economy to proceed near its current pace for the next 12 to 18 months. While that means we will avoid sliding back into a recession, it also means that we are unlikely to make much headway at bringing the unemployment rate down.

Brian Higginbotham, U.S. Chamber economist, is the primary author of this article.