Outlook for 2009 and Beyond

December 31, 2008

The outlook for 2009 is unusually certain. The Canadian and US economies will contract over much of the year. The duration of the contraction is difficult to say – perhaps the entire year and perhaps into 2010.  Anyone who forecasts the exact depth and duration is guessing, that is, using the macro models that did not pick up the severity of the deterioration in 2008.

But we can certainly set the limits of the recessionary trends. It will be about a year, or so and the depth is likely to be a several percent.  This would be keeping within the norms of the past. If there are more nasty surpries, the depth and duration would increase somewhat more.

Of course, a depression-like contraction is highly unlikely. The reason it will not tip into some uncontrolled contraction is straightforward: Keynes rules.  First, the central bakers of the world are pouring money into the system.  But as Keynes originally believed, in a serious contraction accompanied by a  pecipitous fall in consumer and investor confidence, governments should directly stimulate demand by increased public spending. Most of the major governments of the planet are doing so or are about to do so. And finally the Canadian government announced it would follow suit. 

The economies will stop falling because the central bankers will use cheap and available money to seduce consumers and businesses to increase spending AND the governments WILL increase spending.  Aggregate demand stabilizes and then starts rising, as does output.  

And no, the Federal Reserve and the other central bankers will not run  out of money, and so therefore the governments will not “run out” either.  Inflation? See below.

As is usual in these cases, media coverage will create the exaggerated impression of the degree of the distress.  Economic activity will “plunge, be in free fall, collapse, fall through the floor or be devastated “.  Then the economy will “crawl forward, inch forward, drift, probe bottom or stagnate”. The recession is likely to be over before the main media notices.

If you want to actually know what is happening, go the the main public statistical websites. Although these statistics are not perfect, there are no more dependable numbers available.

You will also be told repeatedly that the Fed has “lost its power” and that Keynesian stimulation does not work based on the fact that the recession is still underway.  This argument has always been made in past recessions. But no credible scholar ever said these tools work immediately, or even with a precisely defined lag. 

While the Canadian and US economies are likely to fall by similar degrees and perhaps for a similar length of time both with respect to output and employment , the actual distress in the Canada will be less.  This is because employment growth in Canada has been much stronger, as it has been on average since 1960. For example, from 1995 to date, employment in Canada is up about 28 percent and in the US up about 16 percent. Up to November 2008, employment in Canada was still up year over year, while it had already fallen in the US for much of 2008.

This means that while the number of people receiving employment income has been falling in the US, the erosion in Canada has only begun.  When the economies begin expanding again, Canada is still likely to hold the employment growth record.

of course, many persons will suffer severe career damage during this period, especially the young who have just begun their careers or are trying to launch them. There is of course the obvious damage from being terminated from a job you enjoy. But there are other risks.  There are the persons who only took jobs because they seemed like a stepping stone to somewhere else. Now it will take longer to  take that “step”.  That leaves aside the fact that many of these transitional positons were not very well positioned in the best of conditions, never mind today. And of course, many will now to be afraid to move.  As a result, this recession will trap the unwary into jobs they can barely tolerate for the rest of their careers. This is what former recessions did to many of my students, too many.

Others will flee to grad school and not know what to take or what research to do. They then graduate older, poorer and still nowehere nearer their destination, assuming they even had one.

Others will become so anxious they will take any job as a short term survival response.  That might be reasonable in some circumstances, but it should still be the best job available, meaning most likely able to facilitate your next step.  And you should never enter such an expedient job without a careful plan of how to exit to your desired job as soon as possible.  Frighten persons tend not to make good career choices.

For the past several decades, the quality of jobs open to university graduates has deteriorated.  First, most jobs were OK from the point of view of conditions, income and satisfaction, with a few very good jobs and a few which were deadends or slave shops.

Today, the relative number of OK jobs has shrunk, with good and bad jobs both rising in number. In other words, your career is more likely to be bad than OK.  Incidentally, bad often mens working insane hours for a professional wage. [Just do not calculate your hourly rate.] 

As was always true, your best avenue to career success in prosperity or distress is to do the work you love for its own sake.  How else could anyone expect to meet the rising competitive pressures of the global economy? Since this was true in times of strong growth, it becomes urgently true today. What company wants to hire someone adequate given the challenges ahead.  They want excellence, even when they cannot recognize it.

Subsequent postings will discuss strategies for career success in today’s interesting times.


While the outlook for 2008 is virtually a given, the longer term gets truly interesting. Indeed, an understanding of the next several years provides valuable insight for career, investment and opportunities for enterprise and innovation.

Growth in the US for at least the next 5 years will be relatively slow. It cannot be otherwise. Once the economy starts to grow again, the Fed will have little choice but suck the now excess money back to itself.  Otherwise, it will set off an inflationary blowout.  Will it have the nerve to do so, in face of loud opposition? It will of course try to do this in a measured way, but inflationary pressures have their own timetable.  If the Fed responds too slowly, it will put the US dollar under serious downward pressure, provoking another kind of crisis. The most likely outcome over the next 5 years: higher inflation and interest rates than historically normal. That means slower real growth than usual.  Indeed, we just might define a new normal.

In addition, the US deficit will be massive and the government will also have no choice but to reduce it as fast as practical.  As with the Fed, it will be a delicate balancing act.  It will be impossible to avoid raising taxes since the present tax rates cannot support a modern state, never mind one at war. Again, this is a reason to expect slow growth.

There is also going to be massive re-regulation of the marketplace, both in the financial sector and elsewhere.  The failure of the regulatory structure has been so extreme [and so many people are so angry], that the Reagan revolution is about to be undone – emphatically. Those on Wall Street who believe that after the dust settles, it will be back to normal are deluding themselves.  This was just one too many financial disasters.

This still leaves the vexed issue of what the US intends to do with its now nationalized industries in banking and maybe automobiles. There is of course no plan of action yet.

How President Elect Obama plans to execute change will be addressed in a subsequent posting. But it will certainly be government by theatre.

A slowing growing US also creates collateral damage in Canada. However, the diversification of the Canadian economy will be one its key advantages.  When you produce everything from rocks to software, energy to aircraft, your prospects are generally improved. And since Canada’s fiscal position remains strong, there will be no immediate upward pressure on taxes. Compared to the US, Canada’s enviroment for business will be unimpaired. And its past strong employment growth will smooth its path back to growth.  Expect Canada’s foreign trade with non-US markets to slowly grow in relative terms.

I wish you success in the year ahead. Make it your happy new year.