So where were we?

Now that it's been decided who will form the government, it's time to look at the problems facing it and what it can and should do about them. The next few posts will be data-oriented, trying to provide some background.

Today, I'm going to look at the state of the labour market. In the US, labour market conditions alone are arguably sufficient grounds (Menzie Chinn, Jim Hamilton, Brad DeLong) for concluding that the American economy has been in recession for several months now:

The recent jump in US unemployment rates is not (yet) something we've seen here:

Now that we have a bit of a historical perspective, I'm going to focus attention on what's been happening in the last couple of years. Here's a graph for employment in Canada and the US since 2007:

US employment peaked in November of last year, but the most recent LFS release put Canadian employment at an all-time high. Indeed, the employment increase in September 2007 was the largest we've seen since Statistics Canada started recording this series in 1976.

Next up are employment rates:

Canadian employment has grown slightly faster than the working-age population since the beginning of 2007, but the US civilian employment-population ratio has fallen by more than one ppt.

Employment growth has slowed somewhat in Canada, but it is still positive.

As Nick Rowe mentioned recently, Canadians read too much US media. In the US, the story of the financial crisis is taking place in a background of an economy that was in recession even before the meltdown. But that's not the case here.

Comments

[Chris S]

I'm a little concerned about comparing the U.S. and Canada numbers. Here's why.

I did a straight image stamp (with alignment) of the overlap times for the U.S. and Canada unemployment rates. Historically, Canada's is almost always higher - it's only just now, the end of '07, that the two curves cross, something that hasn't happened since '81-'82, when they matched almost perfectly. In particular, it appears that the Canadian unemployment rate was higher than the U.S. for most of 2007.

Meanwhile, though, for all of 2007, the Canadian employment rate is also higher. Somehow, we are simultaneously keeping more people employed even while we have more off work.

Are there structural differences in what these numbers mean between the Canada and the U.S.? I would think that we need to be careful about direct comparisons unless we can be at least somewhat certain there is a reasonably basis for comparison between Canada and U.S. statistics.

[Stephen Gordon]

It's certainly the case that comparing levels is somewhat problematic. That's why I focus on the changes; the longer-term structural differences in levels should more or less cancel out in the short run.

[furiouscalves]

isnt the difference maybe associated to canada being a commodity producer - let check it out a year from now.

[EclectEcon]

Possibly, too, there's good reason to think that the natural unemployment rate in Canada has been drifting downward over the past five or so years?

At any rate, thanks for posting the graphs -- very interesting!

[Curmudgeon]

Even though we're in much better shape than the Americans right now, we're so closely tied to the American economy that the disaster that's in the process of hitting them is going to harm us as well. As furiouscalves says, let's see what the comparative graphs look like in a year or two. We won't be in such great shape after US demand craters to bedrock.

Putting most of our eggs in the single basket of servicing American resource demand was not smart.

[Stephen Gordon]

I don't know how you can be so certain of that. The last time the US went into recession, the Canadian economy was only marginally affected.

The story of how a recession in the US is transmitted here isn't as simple as you might think. I'm going to come back to this point later; for now, I just want to set out the facts as they are right now.

[Curmudgeon]

Using 2007 numbers[1], about 26% of our economy directly depends on exports to the US because 74% of exports are to the US and exports make up 35% of our GDP. Therefore, if US demand for our exports drops by 5% then 1.3% of our economy will evaporate as a direct result, even if our business cycle doesn't sync with the US business cycle. Granted, many of our exports can be redirected to other markets[2] but it's difficult to imagine a scenario where US demand could crater without us feeling at least some fallout for the time it took to establish links with other buyers.

[1] http://www.dfait-maeci.gc.ca/eet/trade/sot_2008/sot-2008-en.asp (Figures rounded.)

[2] Within the limits of physical infrastructure. For example the lack of VLCC loading facilities would make exporting oil elsewhere difficult to do on short notice.

[Nick Rowe]

It's all in the lags.

If the Bank of Canada had instant data, if the Bank responded to that data instantly, and if the economy responded to the Bank's actions instantly, a US recession would not cause a Canadian recession (at least, not via the export channel). The US economy starts to slow down, the Bank of Canada instantly sees this and cuts the overnight rate, the exchange rate falls instantly, the lower interest rate and exchange rate cause demand for Canadian goods to instantly increase to offset the declining demand from the US.

Probably the last lag is the most important. To generalise Curmudgeon's example, it takes time to reallocate resources from producing goods for the US consumer to producing other goods for other buyers. Thinking about it this way, the distinction between cyclical and structural unemployment becomes less clear.

If the decline in US demand were the only shock, I would predict a mild Canadian recession. But I don't think it will be the only shock. One big unknown is the fallout from the financial crisis on Canadian consumption and investment. A second big unknown is the fallout from falling Canadian house prices, especially its effect on construction. The last few years have been a construction boom as much as a natural resource boom. Construction seems to be overdue for a correction.

[westslope]

curmdugeon wrote: Putting most of our eggs in the single basket of servicing American resource demand was not smart.

The buyer isn't important per se as long as the buyer pays international prices and honours contracts. But tilting the national playing field to resource extraction was unfortunate for a whole series of reasons.

Per capita income growth was sacrificied, social wealth accumulation was sacrificed, non-resource service and manufacturing sectors were sacrificed, human capital accumulation was skewed, community-level social capital was sacrificed in the rush to privatize public wealth, per capita public services suffered, crime rates soared in many communities.

I'd like to share your optimism Stephen Gordon. In terms of levels, on an aggregate basis, Canada should stay ahead of where it was in the late 1990s following the Asian financial crisis when many commodity prices hit recent historic lows. In terms of first differences, the coming economic correction will hurt, especially in resource-levered regions.

What I observe in resource output and capital markets over the last year combined with the stylized facts of housing sector/financial sector lead recessions all point to a bust that will be painful.

Are we comfortable with the notion that recessions can be usefully viewed as market coordination failures? Granted, the North American economy does not exhibit typical inventory overhangs. But look a little closer. The countryside is littered with excess housing capacity and the largest, newest fleet of automobiles in history. In passing, many pundits have seemingly failed to recognize how the housing bubble advanced hand-in-hand with a frenetic pace of new automobile purchases and, of long-horizon productivity growth concern, galloping obesity.

The downside will be nastier if Canada continues to bring in excess of 400,000 immigrants a year. As for public infrastructure and services catching up, there is always the next decade.