This post is a guest  contribution by Asha G. Bangalore * of The Northern Trust  Company

The main theme of the opinion piece by Representatives Hensarling and Ryan from Texas and Wisconsin, respectively, in today’s Wall Street Journal (Jeb Hensarling and Paul Ryan: Why No One Expects a Strong Recovery - WSJ.com) is poor economic policy choices of the current administration. To make their case they focus on the Reagan administration’s successful economic policies. The success/failure of economic policy choices can be measured by various metrics. It is well known that the federal budget deficit as a percentage of GDP during the Reagan years has been the largest in the entire post-war period ending 2008 (see chart 1). Therefore, from a fiscal perspective, the perceived success of economic policies of the 1981-1988 period is not a resounding success.

Northern Trust posted a short comment yesterday on the Fed’s announcement to reduce the term of discount window loans from 90 to 28 days, effective January 14, 2010. To put this decision in historical perspective, the Fed increased the maturity of discount window loans from overnight to 30 days on August 17, 2007, and again to 90 days on March 16, 2008.

Asha Bangalore, economist of Northern Trust, argued that the need for discount window loans had decreased significantly from the period following the collapse of Lehman Brothers (see graph below). “This [Fed's announcement] marks the beginning of a gradual withdrawal of the extraordinary support the Fed has extended to the global financial system as signs of stability have emerged,” she said.

Source: Northern Trust - Daily Global Commentary, November

This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.

The main aspect that stands out in the October 2009 Senior Loan Officer Opinion Survey is that lending conditions were less tight than survey results of July 2009 indicated and there was a substantial improvement from the October 2008 survey when credit markets had frozen. The net fraction of banks that reported tightening standards on commercial and industrial (C&I) loans for large firms dropped to 14% during October from 31.5% in July and was noticeably below the peak of 83.6% reported in January 2009 (see chart 1). A similar reduction in the number of banks reporting tightening lending standards was reported for C&I loans to small firms (see chart 1).

However, demand for C&I loans continued

The US Labor Department announced yesterday that the unemployment rate had risen to a 26-year high of 10.2% in October - an increase of 0.4 of a percentage point, even though the labor force contracted as well.

The graph below, courtesy of Chart of the Day, illustrates the unemployment rate since 1948 and provides some perspective on the current state of the labor market. As shown, Friday’s increase above the 10% level marks only the second time such a move has occurred during the post-World War II era.

Closer analysis of the chart indicates that the unemployment rate is a lagging indicator, peaking after the end of a recession. However, in the case of the previous two recessions the rate only peaked several quarters later following an improvement in real GDP. Asha Bangalore (Northern Trust) said: “A similar case is projected for the current recovery.

This post is a guest contribution by Asha Bangalore * of The Northern Trust Company.

The recession is behind us. Real gross domestic product of the U.S. economy grew at an annual rate of 3.5% in the third quarter after a 0.75 drop in the prior quarter. This is the first increase of real GDP after a string of four quarterly declines. Real GDP has declined in five out of the six quarters of the recession.

The Business Cycle Dating Committee of the National Bureau of Economic Research will make the official announcement after it confirms the turning point based on revisions of economic data. This recession is the longest on record in the post-war period and the deepest also. Real GDP has declined 3.8% from the peak in the second quarter

This post is a guest contribution by Paul Kasriel* of The Northern Trust Company.

There is a growing concern about an inflationary threat in the U.S. economy given the enormous monetary accommodation the Fed has put in place. As expected, there are differing opinions about this issue. First, the unemployment rate in September was reported as 9.8%; the all inclusive unemployment rate is 17% (see chart 1).

Wages are unlikely to be the cause for a large increase in inflation in the near term because widely used measures of wages pressures are trending down (see chart 2), given the lack of demand in the labor market. By the way, the Federal Reserve tracks these variables to form its assessment of inflation.

This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.

The tone of the policy statement and details are largely close to expectations. The federal funds rate was left unchanged at 0%-0.25%. The statement reiterates Chairman Bernanke’s opinion that an economic recovery is underway, representing a significant departure from the August policy statement which noted that “economic activity is leveling out.” The outlook for inflation remains favorable in the Fed’s opinion due to “substantial slack” in the economy. In addition, the stability of longer-term inflation expectations was cited to rule out the case of an inflationary threat.

The last paragraph of the Fed policy statement is devoted to the outlook of monetary policy. The Fed left the stance unchanged to read as follows: “The Committee will maintain the target range for

This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.

The National Bureau of Economic Research (NBER), the arbiter of business cycles, officially announced the trough of March 1991 on December 22, 1992 and the trough of November 2001 on July 17, 2003. Based on this history, there is a lapse of roughly 20 months before the Business Cycle Dating Committee has announced the date of a business cycle trough. Real gross domestic product had risen in the second quarter of 1991 (see chart 1) and the fourth quarter of 2001 (see chart 2) and stayed positive until the next recession.

Real gross domestic product is projected to show an increase in the third quarter of 2009. Real gross domestic product is a quarterly estimate.

This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.

• Andy Xie (Caijing.com.cn): New bubble threatens a V-shaped rebound, August 20, 2009. Instead of a V-shaped recovery, we may instead get a W curve. A dip next year, although perhaps not statistically deep, could deliver a profound psychological shock. Financial markets are buoyant now because they believe in the government. The second dip would demonstrate the limits of government power. The second dip could send asset prices down - and keep them down for a long time.

• Economist.com: U, V or W for recovery, August 20, 2009. The world economy has stopped shrinking. That’s the end of the good news.

• Ambrose Evans-Pritchard (Telegraph): There’s no quick fix to the global economy’s excess capacity,

The Federal Reserve Board’s Senior Loan Officer Opinion Survey has just been published. This is an important document for assessing to what extent credit markets are thawing and confidence is returning to the financial system. The analysis below is a guest contribution by Asha G Bangalore* of The Northern Trust Company.

The latest Senior Loan Officer Survey reports a small but notable easing of loan underwriting standards but demand for loans was weak with the exception of residential mortgages. The number of banks tightening underwriting standards for commercial and industrial (C&I) loans to large firms was smaller in July (30%) compared with the results of the April survey (40%); the peak was a little over 80% of bankers reporting strict terms for borrowing in the fourth quarter of 2008 (see chart 1).