The economy may show flashes of strength before the end of the year, says one of Canada's best known economists, but a real recovery "is a 2009 story."

In an article published Thursday, BMO chief economist Sherry Cooper says the key to a turnaround remains a recovery in U.S. housing, which would boost economic growth, reduce credit risk and thaw the credit freeze.

The U.S. Treasury's takeover of Freddie Mac and Fannie Mae helps, but the country is still teetering on the brink of a recession, Cooper said.

Consumer spending, which had been a mainstay of the economy in recent years, has pulled back sharply as Americans face rising prices for necessities, such as food and gasoline, she said. "Consumers are tapped out."

In addition, Cooper said American savings rates in Q2 jumped from 0.2% to 2.6%, the largest rise in six years. "This is a traditional recession signal," she said. "Savings rates rise as consumers tighten their belts and refrain from buying the extras."

With the global economy slowing, she said, any improvement in the U.S. trade deficit is likely going to be slow as well. Even if American GDP growth remains positive, Cooper explained, persistent declines in employment and weakness in real sales "might be enough for the (National Bureau of Economic Research) to declare a recession."

Canada's economy has also slowed and the TSX has fallen sharply on the heels of commodity price declines, Cooper said.

However, she explained there are encouraging signs in Canada, including the fact that job prospects are far better north of the border. The U.S. Manpower Employment survey of hiring intentions is at a five-year low, Cooper said, "suggesting further nonfarm payroll declines ahead." Considerable weakness is also evident in the financial, insurance and real estate sectors where hiring intentions are at a 16-year low, she said.

"In direct contrast, the Canadian Manpower survey showed steady hiring plans in Q4," Cooper said. Canadian employment growth has slowed somewhat reflecting the recent decline in the terms of trade and housing markets in most parts of the country, she explained, but even though it is off its peak, "the still-high employment rate suggests solid underlying support for domestic demand."

She said she expects to see the U.S. jobless rate rise above Canada's rate "soon."

By Geoff Matthews and edited by Sarah Sussman
©CEP News Ltd. 2008