Maybe the Canadian recession will be short and shallow

As Menzie Chinn reports (I've seen other references, but Econbrowser is a sufficient statistic as far as these matters go), there seems to be some sort of consensus forecast to the effect that the US economy will bottom out about sometime around mid-2009, although there is a certain divergence of opinion about just how deep that trough will be.

To the extent that the principal driving force for a Canadian recession continues to be a US slowdown, then this is encouraging news. If the Canadian economy was able to continue creating jobs for 10 months after the US fell into recession, then there's a decent chance that it will be able to do so once again when the US economy picks up:

• After so many months of weak auto sales, people are eventually going to have to replace their old beaters.
• Similarly, if and when the US housing market bottoms out, the demand for forestry products will pick up.
• A US recovery will boost oil and other commodity prices.

Et cetera. The US economy may still be well below potential output for a long period to come, but the fact that it stops contracting may be enough to pull us out of recession after only two or three quarters.

Comments

[Patrick]

If that is the case, and the commodities prices resume anything like their previous trajectory, then maybe Canada should be more worried about inflation than deflation.

This is starting to make my head spin.

[Stephen Gordon]

No kidding. For months, I've been concentrating on looking for signs of a business cycle peak. And now that it's here (I'm declaring October to be the peak, all the numbers from November on are uniformly stinky), it's time to start looking for signs of a trough. I didn't expect to see them so soon.

[Andrew F]

Increases auto sales won't mean those cars are manufactured in Canada, as a good percentage of the Canadian makers are on the brink of receivership (and mediocre sales won't change that). And the glut in American housing is only just starting. Housing gluts tend to last for years after the trough due to lag in construction. For instance, the Toronto construction industry should expect to be slow for a few years because of all the new condo units in the pipeline. 2007 was a banner year for condo sales, and many of those units will be up for sale before or by the time they are completed.

[Stephen Gordon]

True enough. I don't want to push this notion too hard (which is why there are a lot of weasel words in the post), and there's no data I can point to. But it provides a certain measure of hope to balance out some of the despair that's out there.

[learning james]

Maybe.

And your seem to think so.

But haven't we have relied too heavily on models for such predictions ?

Models do not capture changes in sentiment. With households networth collapsing (House value, RSP, savings, investments) and employment and income declining, these 'shocks' will bring about a serious recession.

I like your blog, your optimism and your politics http://worthwhile.typepad.com/worthwhile_canadian_initi/2008/12/a-fiscal-stimulus-proposal-that-should-be-implemented-but-wont-be.html, but please get serious about this problem and propose solutions.

Perhaps it is an American thing, but I do like Dr. Krugman's attitude being out there with very strong opinions.

They are much needed.

Diffidence, as you know, is fatal: http://worthwhile.typepad.com/worthwhile_canadian_initi/2008/12/economists-fatal-flaw-diffidence.html

And we need to do better than "For example, I've not been able to make head nor tail of stock market data since 1995. But my reaction has been to shrug, and wonder where my thinking had gone wrong. It quite literally never occurred to me to write a series of op-eds"

We need leadership !

[duncan cameron]

Was the Stephen Gordon that wrote this: "the principal driving force for a Canadian recession continues to be a US slowdown", the same Stephen Gordon posting very persuasive charts showing how independent Canada was of the U.S.? It seems to me I read here, and then cited in a recent publication, that Canadian exports to the U.S. went up in the last slowdown.
Maybe between TV appearances Stephen you could find time to update your interesting research on cross border influences on Canada.
I happen to think the Canadian recession will be deep, and persistent, unless we get the right policy tools working in the proper fashion to deal with it. I fear the worst with Harper and Co. talking restraint, and the media listening to bank economists on the importance of cutting taxes. What is needed is public investment, transfer payment increases, and a structural shift in policy towards re-distribution of income (from higher to lower, not as at present in the other direction) and public ownership.

[Stephen Gordon]

I assume you're talking about this post from December 2007?

The point was that the expansion was not based on increased exports, it was based on an increase in the terms of trade generated by rising prices for oil and other commodities. Here's what I said:

Would a US recession reduce our terms of trade? Probably, but much less than in the past. Oil and commodity prices are being driven largely by Chinese and Indian growth, and those forces don't look to be slowing down anytime soon.

I think this analysis explained what we saw in 2008: as long as commodity prices didn't fall, Canada was spared from a recession, even as the US situation deteriorated.

[duncan cameron]

In 08 the Canadian economy contracted in quite a few months. Was this due to the U.S. downturn? Or was something going on in the Canadian economy? Most accounts, other than yours, had the two economies so integrated that Canada got the U.S. economic weather regardless of what else occurred. My own take is that some decoupling took effect when Canada lost manufacturing capacity 20 years ago after the FTA and with the Crow tight money policy leading on to the recession of the early 90s. Subsequently Canada became more commodity dependent, which is what the theory of comparative advantage would have predicted following the first FTA. The Canadian economy climbed after the devaluation of the dollar in the mid 90s, and the strengthening of commodity prices.
Without sector specific industrial policies, Canada is not going to be anything other than a services plus commodities economy. Your research on terms of trade centres the discussion where it belongs. The Canadian story is commodity dependency, not so much dependency on exports to the U.S. The obvious exception, and it is hugely important, is auto. Energy merits its own story, and so does food.