Although the U.S. economy transitioned from recession to recovery in June 2009, improvement in job growth, the housing market and other areas has seemed to crawl at a snail's pace. In a recent interview, T. Rowe Price Chief Economist Alan Levenson offers insights into the nature of the recovery and his expectations for the economy going forward.

Levenson does not believe the economy will slip into a "double dip" recession even though the pace of growth remains subdued. He anticipates growth of approximately 2.5% in the second half of 2010, rising to about 3% next year. Some of the developments that make another recession unlikely are also responsible for the muted pace of the recovery, notably a stabilization of new housing construction at very low levels. For example, new housing starts have stabilized at a very low level—about half the pace eventually necessary to keep up with population growth.

One hurdle that has proved particularly difficult to overcome is the continuation of high unemployment. Levenson says that the unemployment rate may start to decline more consistently by early 2011. He notes that the 750,000 private sector jobs added through the third quarter of 2010 represent genuine progress following a sustained decline in employment during the first six months of the recovery.

In addition to the housing and labor markets, another area where Levenson sees reason for optimism is consumer spending. While slower job growth has meant slower income growth, having both of those measures in positive territory means consumer spending is on the way up. "The good news is that the statements or fears that consumers are tapped out are just not true because income is growing," Levenson asserts. Levenson does not believe that the U.S. runs the risk of experiencing a deflationary spiral like that of Japan in the 1990s, with consumers holding off on purchases in anticipation of lower prices, in part because we have undertaken much more aggressive monetary policy. However, consumers are still showing uncertainty about the strength of the recovery and the direction of tax policy.

Levenson mentions two areas of risk that could potentially derail or further slow the recovery. First, the levels of uncertainty over tax policy, financial and energy regulation, and health care costs that have held back consumer and business spending could deepen. Another area of concern is China, which has resisted adjusting its exchange rate and may face difficult repercussions the longer it waits to do so.

With so many potholes on the road to recovery, it's difficult to be highly enthusiastic about the near-term economy. But Levenson is guardedly positive. The U.S. government and the Federal Reserve have taken aggressive action, and as a result we are emerging from a very severe recession. In his view, gross domestic product may even return to pre-recession levels by 2011. Nonetheless, until employment recovers-which could take another two to four years-the economy will look like more fizz than pop.