Financial Update

America stares recession in the face

Alia McMullen, Financial Post A "catastrophic" drop in U.S. manufacturing activity in September left no doubt in the minds of stunned economists Wednesday that the U.S. recession had well and truly arrived, and it could be severe.

The sharp contraction in activity was the starkest example yet that the credit crisis was having a devastating effect on business amid other evidence that limited access to credit and high debt financing costs were killing merger and acquisition activity and potentially damaging company profits. Mike Englund, chief economist at Action Economics in Boulder, Colo., said the figures reinforced his view that the National Bureau of Economic Research would eventually deem all of 2008 as a period of recession.

· TSX -38.39pts
· Dow -19.59pts. a disappointing economic report on the manufacturing sector and more troubles in the battered auto industry, weighed on the markets most of Wednesday, suggesting the United States has slipped into a recession that could last some time
· Dollar +.19c to $94.16US.
· Oil -2.11 to $98.53US per barrel
· Gold +$6.50 to $880.70US per ounce

More voices join chorus calling for rate cuts

Julian Beltrame The Canadian Press OTTAWA

The Bank of Canada is being urged to jump into the fray of the financial market meltdown by aggressively cutting interest rates.

The tight credit environment, due to upheaval in the U.S. financial industry, has fundamentally altered the outlook for both the global and Canadian economies, analysts say.

They add that the key issue now is not whether Canada's central bank should lower rates, but if it should take the rare step of acting before its scheduled announcement date of Oct. 21.

It's been nearly half a year since the Bank of Canada adjusted its overnight lending rate, which has been set at three per cent since April 22, when it made an aggressive half-point cut.

"I think under normal circumstances, if we didn't have the political (election campaign) and we didn't have this bailout package going through the U.S. Congress, we might be in a situation where the central banks would already be cutting now,'' said Douglas Porter, deputy chief economist for BMO Capital Markets.

In the U.S., a $700-billion financial rescue plan was approved by the Senate last night and expected to go to the House for approval before week's end.

The vast majority of economists backed Bank of Canada governor Mark Carney last month when he held firm on interest rates, although Scotiabank's Derek Holt called for a half-point cut.

Regardless of the relative health of auto industry sales in Canada, the downturn south of the border is worrisome for Ontario-based car, truck and parts makers that export most of their volume across the border to the United States.

Economists are expecting to see real blood on the floor tomorrow when the next U.S. employment report is released, forecasting upward of 150,000 job losses for September.

A big danger, say economists, is that lenders may be so spooked that they totally freeze credit, depriving businesses of funds needed to carry on operations or expand, and also depriving consumers of loans for such things as mortgages or cars.

In a speech last week, Carney warned that Canada would be impacted by a U.S. slump, particularly the auto and forestry sectors that depend on exporting to American consumers