Bad sign for domestic demand?

If a severe recession is to occur in Canada, it will have to be home-made. A 1% shock to growth in the United States translates to about o.33% in Canada and so even a very severe contraction in the US may not be enough to drag the Canadian economy into a deep recession if domestic demand holds up. However, recent construction data shows that may be a big if.

Residential and Non-Residential investment in structures is clearly softening. Recent building permit data show declines in permits and housing starts have been trending sharply lower for many months. However, it is not the direct impact of the slowing construction sector that has me concerned - investment in structures is only about 10% of GDP - its the potential impact on employment, and therefore personal consumption, from a slowing construction sector. As Stephen Gordon points out, unemployment in the construction sector is at an all time low and construction currently occupies about 7% of the labour force, well above historical average levels.

Seasonally adjusted construction employment fell by 44,000 jobs from November 2008 to December 2008 - if this trend continues, and I think it will, it will be much harder for the economy to escape with only a short and shallow recession.

Short and Mild?

Private sector and Bank of Canada forecasts imply that the Canadian economy will experience a brief and mild recession, spanning perhaps the fourth quarter of 2008 to the first or second quarter of 2009. How do these forecasts compare with past recessions? Check out this graph from the Parliamentary Budget Office:


Is it likely that a Canadian recession will be only slightly worse than the 2001 slowdown given a protracted and painful recession in the economy of its largest trading partner? I'll call it now - Bay Street will be revising its forecasts substantially downward in the next couple of months.