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Weekly Economic Commentary


Bernanke Maintains Cautious Stance

February 29, 2012

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Chairman Bernanke maintained a cautious stance in today’s testimony at the Committee on Financial Services of the House of Representatives and left the door open for additional monetary policy easing. He opened his remarks with the observation that the “pace of expansion has been uneven and modest by historical standards.” In his opinion, economic activity is likely to match the pace seen in the latter half of 2011. The U.S. economy advanced at an average pace of 2.4% in the third and fourth quarters of 2011.

Chart 1 - 02 29 2012

With regard to the labor market, Bernanke noted that the “decline in the unemployment rate over the past year has been somewhat more rapid than might have been expected, given that the economy appears to have been growing during that time frame at or below its longer-term trend: continued improvement in the job market is likely to require stronger growth in final demand and production. Notwithstanding the better recent data, the job market remains far from normal” (emphasis added). Essentially, the Fed continues to place labor market challenges at the top of the priority list.

Bernanke indicated that although household spending advanced moderately in the second half of 2011, the “fundamentals that support spending continue to be weak: Real household wealth and income were flat in 2011, and access to credit remained restricted for many potential borrowers.” In the housing sector, Bernanke sees lack of credit availability as a restraining factor. He reiterated that that inflation will run at or below 2.0% that is consistent with the mandate. The recent gain in gasoline prices as a temporary influence on prices. In this context, Bernanke pointed out that inflation expectations are consistent with the Fed’s view that inflation will remain subdued.

Private Sector vs. Government Sector in the Current Recovery

Real GDP of the economy is estimated to have grown at an annual rate of 3.0% in the fourth quarter, an upward revision from the advance estimate of a 2.8% increase. Upward revisions of consumer spending, outlays of structures, residential investment expenditures and government spending more than offset downward revisions of exports and equipment and software spending to yield a slightly higher reading of real GDP growth for the fourth quarter of 2011. The U.S. economy has advanced for ten straight quarters after the recession ended in June 2009, with the private sector pulling the engine rather than the government. Chart 2 is an indexed chart where the level of private sector and government outlays are set equal to 100 at the trough of the recession (2009:Q2) and the two components are computed for quarters before and after the recession. A reading of 102 denotes a 2.0% increase from the trough, while a reading of 97stands for a 3.0% decline. As seen in Chart 2, at the end of 10 quarters of economic growth, private sector spending has risen 8.5% from the trough, while the combined outlays of federal, state, and local governments dropped 3.6%.

Chart 2 - 02 29 2012











The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.