Third-quarter figures on bank lending by sector released by the Bank of England today suggest banks provided massive support to off-balance sheet vehicles, hedge funds and other financial intermediaries during the August / September market dislocation. The chart aggregates the flow of new sterling lending to three industries: “other financial intermediaries”, “fund management activities” and “other auxiliary activities”. The third-quarter total of £41 billion is a record and amounts to 19% of the outstanding stock of loans to these industries – equivalent to a 99% annualised growth rate!

In my mid-year forecast update, before the “credit crunch”, I suggested US economic prospects had improved relative to other major countries. We now know that US GDP rose at annualised rates of 3.8% and 3.9% in the second and third quarters. The US is likely to have grown faster than other G7 economies over the two quarters.

Improved trade performance has been a major component of this strength. Net exports contributed 1.3 percentage points to annualised growth in the second quarter and 1.0 p.p. in the third. This more than offset the direct impact of the housing recession: residential construction subtracted 0.5 and 0.9 p.p. from growth in the two quarters.

Yesterday’s ISM manufacturing survey showed a rise in the index of export orders and a sharp fall in imports. The gap between the two indices reached a 12-year high, suggesting net exports will continue to contribute strongly to GDP growth in the current quarter – see chart.

The “credit crunch” will hit fourth-quarter growth but I remain hopeful that economic weakness will be contained.

“Other assets” on the Bank of England’s balance sheet rose by a further £2.2 billion in the week to Wednesday 31st October, bringing the cumulative increase since 12th September to £22.8 billion. This is the best available estimate of the extent of the Bank’s support to Northern Rock.

The weekly rise is the smallest since the Rock crisis broke but follows a £4.7 billion gain last week. With deliberations on Northern Rock’s future dragging on, the loan seems likely to grow further and may approach £30 billion – the amount requested from the Bank by Lloyds TSB as a condition of its aborted rescue takeover.

The balance sheet figures also show the Bank has drained liquidity from the banking system over the last week, with reserves falling from £24.1 billion to £20.0 billion. This action seems inappropriate given that interbank interest rates remain high relative to Bank rate and suggests the Bank has yet to learn the lessons of recent events.

Another favourite stomping ground of gloom-and-doom merchants is the dear old UK housing market. Remember those forecast house price crashes of 2005, 2003, 2001 etc.? Don’t worry – this time’s for real. Just look at the fall in mortgage approvals – down by 20% in 10 months; and the latest RICS survey showed a net balance of 20% estate agents expecting prices to drop.

Trouble is, mortgage approvals plunged by 43% in 2004, while the RICS expected prices balance reached -29%, and still prices didn’t fall.

Brian Durrant of The Daily Reckoning keeps arguing that the housing market will be the victim rather than the assassin of the economy. In other words, prices are unlikely to fall unless economic growth slows sufficiently to put upward pressure on unemployment. Leading indicators have yet to signal significant economic weakness and labour market conditions are currently solid.

Add to that a continuing lack of supply. Another good indicator from the RICS survey is the ratio of the current sales pace to the stock of homes on the market. As the chart shows, the ratio remains far above the low reached in 2005 and at a level historically consistent with modest price inflation.

I am not optimistic about medium-term prospects for UK house prices but the bears are getting overexcited.

Have you noticed how every piece of US economic news is being written up bearishly? Such one-way sentiment often signals an imminent reversal.

Take last week’s figures on new home sales, which – incidentally – are a better guide to current housing market conditions than existing home sales, because of a shorter reporting lag. New sales rose by 4.8 % in September while the stock of unsold homes fell again to a 20 -month low. Was that the message you got from your favourite economics correspondent? Of course not. I bet he / she talked about sales reaching an 11-year low in August, while opining that the September rise was a bounce of the dead feline variety.

Or consider yesterday’s consumer confidence number for October, which “slumped to a two-year low” and “raised the prospect of a marked deterioration in business conditions in sectors such as retail and consumer goods”. Call me senile but I have no recollection of the late 2005 consumer collapse. Take a look at the chart, which plots quarterly consumer spending growth with the confidence index. Does the recent move lower look like a “slump” to you? The relationship is not particularly close but it is a stretch to argue that spending is about to plunge .

GDP growth should slow in the fourth quarter but when expectations are this low it doesn’t take much to generate a positive surprise.

The release accompanying the Fed’s 50 b.p. rate cut on 18 September stated that the move was intended to forestall the adverse effects of tighter credit conditions. Credit markets have yet to normalise fully but are moving in the right direction. For example, the spread between the discount rates on three-month non-financial commercial paper and Treasury bills has fallen from over 100 b.p. at the time of the last Fed meeting to 60 b.p. currently. An earlier post argued that such a decline would support a forecast of contained economic weakness.

Economic news since the last meeting has been no worse than feared. August’s 4k decline in payroll employment, which provided convenient cover for the Fed’s 50 b.p. move, has since been revised to a gain of 89k, with a further rise of 110k reported for September. Third-quarter GDP figures tomorrow are expected to show annualised growth of about 3%, although a softer number is likely in the fourth quarter, reflecting higher energy costs as much as the “credit crunch”. Housing data have been weak but there are signs that activity is bottoming.

The Fed’s policy decisions have significant spill-over effects globally, particularly in emerging markets, where exchange rate links to the US dollar result in monetary conditions mirroring US developments. Policy-makers have been trying to restrain economic expansion in many emerging countries but their efforts were undermined by the Fed’s September cut. The emerging world boom is providing important support to the US economy in the form of strengthening export demand while putting upward pressure on headline (and possibly core) inflation as oil and other commodity prices continue to surge.

Current conditions may be contrasted with 1994 and 1997, when the Fed tightened monetary policy based on domestic considerations while emerging markets were in a weakened state, leading to the Mexican peso and Thai baht crises (December 1994 and July 1997 respectively). These crises fed back into slower US growth and downward pressure on inflation via falls in commodity prices, causing the Fed to reverse policy tightening in 1995 and 1998. The opposite feedback relationship currently implies that any further Fed easing will be limited and may be reversed in 2008.

As should be clear, I am unconvinced of the need for a further Fed move this week. However, officials have failed to intervene to check strong market expectations of another 25 b.p. cut so the default assumption must be that one will be delivered. This would strengthen the parallels between current conditions and 1999, when the Fed pumped liquidity into markets into year-end on concern about possible economic disruption from the Y2K changeover, to the delight of stock market speculators.