The Brooklyn Chamber of Commerce presents Regional Economic Reviews as a service to its Members and the Brooklyn business community.  Articles are provided by leading financial Members of the Brooklyn Chamber and also often appear in the Chamber's bimonthly business newspaper, Brooklyn's Progress.

Our current featured columnist is Craig Alexander, senior vice president and deputy chief economist with TD Bank.

What a difference a year makes. In fourth quarter of 2008, the global financial system came under extreme distress in the wake of the collapse of Lehman Brothers. Fear dominated financial markets and the minds of individuals and businesses. This is far from surprising given the vast number of comparisons being drawn at the time to the terrible 1930s. The financial crisis was quickly transmitted to Main Street, bringing a deep economic contraction in late 2008 and early 2009. The extreme interconnectivity of the global economy also became evident, as the most synchronous world recession since the 1930s unfolded.
 
Significant economic damage was done, but the worst fears were not realized. Policy makers responded with deep interest rate cuts, massive coordinated fiscal stimulus and creative actions to help stabilize the global financial system. Although it was a rocky road, these actions paid off. A psychological shift took place in the spring of 2009. Fear dissipated and changed to acceptance that ‘just’ a severe downturn was taking place.
 
By the middle of the year, signs were materializing that the worst of the contraction had passed. The rate of contraction diminished and everything started to point to economic growth resuming in the third quarter, which it ultimately did at a 3.5% annualized pace.
 
The focus is now on the shape of the recovery. The economic outlook has a glass half full, half empty perspective to it. In terms of positives, I believe that the recovery is for real and that worries about a double-dip will prove unfounded. Real estate is stabilizing. Production is rebounding. Fiscal stimulus and record low interest rates should remain supportive in the coming quarters. Unemployment is likely to continue to rise in the near term, but this is traditional for such a lagging indicator and some of the rise in the national unemployment rate will reflect workers reentering the labor market, which is actually a positive.

However, the pace of economic recovery is likely to prove to be quite gradual compared to those in the past. The financial system is being repaired, but this will take considerable time. Loan losses are not over, particularly on commercial real estate. Credit growth should improve, but not in a way to fuel booming economic conditions. Households have experienced a significant loss of wealth and unemployment will be slow to decline, and this is likely to induce a higher personal savings rate and a slower trend rate of consumer spending growth during the recovery.

The bottom line is that the U.S. economy is likely to experience moderate growth of 2.4% in 2010, strengthening to 3.3% in 2011. This pales in comparison to the sharp rebounds that followed the early 70s and early 80s recessions. The moderate-paced economic recovery suggests that inflation should not be a problem, giving the Federal Reserve the flexibility to leave rates on hold until early 2011.

For small- and medium-size businesses, the economic recovery should lift virtually all sectors. Export-oriented firms should benefit from a weak U.S. dollar and improving foreign demand. However, the slow-paced recovery implies a challenging domestic economic climate. Competition will remain fierce, sales growth will improve but prove moderate, and pricing power will be largely absent.  With American businesses and consumers likely to remain tight fisted with their money, domestically-focused firms will need to be innovative and nimble in taking advantage of the improving economy.  Constraining costs will also remain critical to profitability in the near term.   So, the main message is that the economic recovery will bring better times, but only gradually over time.