OTTAWA - Investors run for cover, consumers quake and economists wonder if, two years after the deepest recession since the Great Depression, we are on the precipice of another pullback.
The prognosticators of doom, including U.S. economist Nouriel Roubini, predict a recession is coming and that governments have run out of options or the will to stop it.
But a lot of the data is telling a different story, one that shows the U.S., Canadian and global economies are stumbling, not falling.
Thursday was a typical case of what on the surface appeared to be a disconnect between fear and fact.
While the world waited to see if President Barack Obama's speech Thursday night on job creation can soothe market wounds, the United States and Canada reported robust export numbers that by themselves should have done the trick.
As well, Statistics Canada said building permits, indicative of builders' confidence of future sales, rose to near record levels in July.
On the same day, however, Harris-Decima Research released its latest consumer confidence survey showing households on both sides of the border continued to experience palpitations. Confidence fell more than six points to 77.5 in Canada last month, and plunged to 55.7 in the United States.
Just over one in 10 Canadians saw good times ahead for the economy in the next year. Twice as many foresaw bad times.
Other recent data points have tended to be along the same line. Consumer spending in Canada and the U.S. appears to be holding up; consumer confidence is plunging.
And that may be a big part of the problem, say some economists. While these are not the best of times, investors and consumers are assuming that we are entering the worst of times.
If we are not careful, says Douglas Porter, deputy chief economist with BMO Capital Markets, we could talk ourselves into a recession.
"When you carefully look at all the figures we have for July and a few figures we have for August, there's plenty of evidence that the global economy has slowed, but nothing close to the kind of trauma that's been reflected in financial markets," he says.
"It's almost as if financial markets have all but thrown in the towel on the recovery and (are) pricing in a recession."
Part of the loss of confidence occurred because of what Porter termed the "artificial crisis" in August over whether the White House and Congress could come up with a way to stop the U.S. from technically defaulting on its debt. Few thought a default would occur, but is sowed the seeds of doubt whether the world's biggest economy had its act together.
Even Porter admits the underlying difficulties in the global economy are real. The European debt crisis will strangle growth on that continent for years to come and Washington's fiscal difficulties, while not insurmountable, will also take a toll on growth.
But he adds, everyone has known for some time the recovery would be a long, slow slog.
In Canada, one of the most pessimistic of Bay Street economists is Derek Holt. Scotiabank's vice-president of economics was one of the earliest to warn about a possible slump in Canada in the summer of 2008 and says his colleagues may be overly sanguine about the future now as well.
Not only is a recession possible, Canada could be in one right now, he says. A recession is technically defined as two negative quarters of growth. Canada's economy slipped 0.4 per cent in the second quarter and could also come in negative in the third, which concludes at the end of this month.
Where others see positives, Holt sees a mixed bag. Digging into Thursday's trade figures, he finds a 5.3 per cent decline in nominal business investment. That was supposed to be, along with exports, the bright side of the economy, he notes.
But it's the longer range that worries him and other pessimists. Manufacturers have built in a large overhang of inventory and will need to slow production, he says. Meanwhile, the slowing U.S. economy and strong loonie will keep pressure on exporters.
That leaves consumers again as the prop for the economy. But given wealth shrinkage from the stock market correction, flat wages and loss of confidence, will they be in the mood to keep spending?
"Every single time consumer confidence has plunged in the U.S., going back to the 1960s, it has either coincided (with) or presaged a recession," Holt says.
Holt agrees with Roubini that policy-makers, particularly in the U.S., may have run out of tools to fix the economy. There may not be even agreement on what needs to be done.
Canada's finance minister, Jim Flaherty, said Thursday that opinions are divided about what to do heading into Friday's G7 meetings in Marseille, France.
"Our view is that the G20 commitments made at Toronto to move toward deficit reduction, balanced budgets are essential. There are some who are of a different view," he said.
For all the talk of a second slump, it is interesting to note that none of the major forecasting houses have built one into their most likely projections. Bank of Canada governor Mark Carney and his U.S. counterpart Ben Bernanke both expressed confidence this week that the second half of this year will see growth -- albeit modest.
Still, the risks of a second recession are real, says David Madani of Capital Economics in Toronto. Confidence is so shaky that any shock, such as a European bank failure, could tip economies in the industrialized world over the edge.
Madani believes part of the overreaction among consumers and markets -- if that's what it turns out to be -- is that they were overly optimistic in the first place.
"I think some people really did think it's all back to normal and governments will save the day, they are that naive," he said. "Now we're realizing the cold reality that three years later we're still struggling."
