Oct. 12 (Bloomberg) -- The economy may slow down early next year as unemployment rises and the boost from the government stimulus fades, said Raymond Stone, managing director at Stone & McCarthy Research in Skillman, New Jersey.

“The more troublesome outlook is for the early part of 2010,” Stone said in a Bloomberg Radio interview today. With the end of the cash-for-clunkers incentive and tax credits for first-time homebuyers, “unless we get some footing from the fiscal stimulus we’ve already witnessed, we could have a slowdown in economic growth next year.”

The unemployment rate is rising because more people are re-entering the labor market or joining it for the first time as the economy stabilizes, Stone said. The jobless rate rose to 9.8 percent in September, the highest level since 1983, signaling the recovery will be slow to develop.

“What we ultimately need is continued growth in aggregate demand, which will foster stronger production and ultimately stronger employment,” Stone said. Growth this quarter will be a “little bit slower” than the previous three months, he said, adding, “I wouldn’t be too optimistic” about the retail sales outlook for the holiday season.

The economy will probably grow at a 2.4 percent annual rate this quarter after expanding at a 3.2 percent pace from July through September, according to a Bloomberg survey of economists taken from Oct. 1 to Oct. 8. The jobless rate will exceed 10 percent in the first quarter of 2010, it showed.

Holiday Sales

U.S. holiday sales for November-December will probably fall 1 percent from the same period in 2008, the National Retail Federation forecast on Oct. 6. Last year’s 3.4 percent decline was the first drop since the Washington-based NRF started tracking the data in 1995.

The government’s cash-for-clunkers program, which offered credits of up to $4,500 for consumers to trade in older models for new, more fuel-efficient ones, ended Aug. 24. Auto sales fell 35 percent in September from the prior month to a 9.2 million annual rate, after the clunkers plan expired, according to Bloomberg data.

The government’s $8,000 tax credit for first-time home buyers is due to expire Dec. 1. President Barack Obama and congressional leaders might extend or expand tax credits and housing aid as they seek to counter the decline in the housing market and reverse job losses, lawmakers said last week.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.netThomas R. Keene in New York tkeene@bloomberg.net

Last Updated: October 12, 2009 12:05 EDT