Recession watch

With the recent turmoil in the markets, and the words “slowdown” and “recession” all over the news, the biggest danger is that it becomes a self-fulfilling prophesy. Consumers slow spending based on concerns about what comes next, and businesses put the brakes on new investments based on perceived soft demand. This could drive the economy into recession, and given the growing pessimism of late, with increasing probability.

Today’s Statscan release gives the business side:

Business Conditions Survey: Manufacturing industries
January 2008

Apprehension best describes the mood of manufacturers as they looked ahead to the first quarter of 2008. Manufacturers are expecting tougher times as the rapid run-up in the value of the Canadian dollar and record crude oil prices may be taking a toll on the sector.

As a result, manufacturers were anticipating to lower production and employment levels in the coming three months.

Then add in weaker net exports due to a slowdown in US demand and the high Canadian dollar, and remember undergraduate macro [C+I+G+(X-M)=Y], and consider what this means in terms of rates of change: if we have each of C, I, and (X-M) dropping, where’s that leave G? A slowdown/recession will naturally push the federal budget into deficit, and if the reaction of the feds is to cut spending in order to balance the budget, then G is negative too. Call me a Keynesian, but the change in G should be positive to offset the negatives in the rest of the accounting identity and thus support aggregate demand.

A bit simplistic perhaps and there are lots of if’s in the real equation, but worth consideration as we head into something uglier that we have seen in recent years, and perhaps the first bona fide recession since 1991. And you thought undergrad macro was useless.

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