Economic recovery in sight

In the United States, the third quarter real gross domestic product (GDP) increased by 2.8 percent after consecutively declining for 6 quarters since Dec. 2007. That month was the start of the U.S.' current economic recession, according to the National Bureau of Economic Research. In an effort to explore the outcome of the recession and its possible end, The Ticker interviewed a distinguished finance and economics professor.

Anthony Karydakis, an adjunct professor at the Stern Graduate School of Business at New York University, shared his thoughts on the current economic condition in the U.S. and explained his point of view on the financial markets. Karydakis, who holds a Ph.D. from the University of Paris – Sorbonne, started his career in academia, worked as an economist in the financial markets and returned to academia after an extensive professional experience.
Karydakis said that, "For most of my professional life I have worked in the financial markets."

When asked to share his thoughts on the economy's recovery, Karydakis said, "I think we are already seeing credible evidence that we are emerging from the recession and that it is relatively safe to say that when the National Bureau of Economic Research, which is the official arbitrage of recessions in this country, goes back to date the end of the recession, they will probably point to the third quarter of this year as having signaled the end of the recession."

The professor expects a moderate pace of growth in GDP, in the range of 2.5 – 3 percent. However, he added that this rate of growth, although respectable, is relatively low when compared to past economic cycles in which the economy bottomed out at a faster pace.

According to the professor, the main factor causing the slow recuperation of the economy is, "the banking situation and the reluctance and the ability rather, of banks to lend at a normal pace."

The professor, who worked as the chief U.S. economist of JP Morgan Asset Management, looks at various factors besides the GDP to determine if the country is exiting the current recession.

"We had nearly 3 percent growth annualized; that is a pretty significant sign that you are no longer contracting to put it in very basic, and simple terms," Karydakis said. "But more importantly and perhaps more substantial in terms, we are seeing some key measures in manufacturing activity, showing pretty respectable growth, pretty robust growth actually in the sector itself. Now that is not necessarily the same as saying that the same is happening to the rest of the economy but it is a key sector of the economy showing a come back. We are also seeing a significant decline in the pace of layoffs recently."

The professor argues that, even though the unemployment rate is reaching new highs, labor markets have started to improve. He said that there are significantly smaller monthly job losses.

Another measure the professor pays close attention to is consumer expenditures.

"And you are also seeing evidence that consumer spending is picking up a little bit," Karydakis said. "Some of it is artificially induced because of some special programs that have been put in place, with cars in particular, but another part of it is legitimate because it represents some pent up demand that is gradually starting to get fulfilled and that's what you need."

Given that consumption represents 70 percent of GDP, consumption's increase will be sufficient to assist in the recovery of the economy. The Bureau of Labor Statistics in the U.S. conducts the Consumer Expenditure Survey, which gathers information on spending habits of consumers.

A concern cited by economists and finance professionals when discussing the recuperation of the economy is the inflation/deflation debacle. Karydakis believes the Federal Reserve Bank in the U.S. has done a satisfactory job in controlling inflation.

Karydakis expects inflation to stabilize during the year 2010. "… for the next year it may still continue to reflect past weakness in the economy until it stabilizes around 1 - 1.5 percent and then we will have to start worrying about the opposite problem [deflation] as the economy recovers."

With economic indicators improving, confidence seems to have been restored to the financial markets. However, the professor argues, "I think this is still a shaky environment, we are still susceptible to the risk that we will wake up one morning and see headlines that may remind us of the worst anxiety that the system has experienced."

In trying to cope with the slow pace of the restoration of the economy to its normal level, students and unemployed people might struggle finding jobs. The professor advises students to remain flexible enough to start their careers at the jobs that might be available to them.

"I think it's absolutely paramount in the minds of students that come out into the job market to be flexible in terms of the first job they would be willing to take," Karydakis said. "Things are tighter now, and it will require some flexibility, some ‘zig zagging,' in terms of career plans."