Jeff Rubin, chief economist at CIBC World Markets, is calling a recession for the United States and Canada.

“The September 11th reign of terror didn’t cause the recession, but it’s finally allowed markets to recognize one,” says Rubin.

“In reality, the U.S. economy began contracting in the spring, and will continue to fall over the balance of the year. While that may not yet be apparent in quarterly GDP, it’s written all over the monthly data on industrial production, employment, business spending, and soon, consumer spending as well.”

So far the weakness has been concentrated in business spending, with the consumer left to support the market. Now Rubin says there is evidence that corporate cutbacks are hurting consumers. “While the stock market declines didn’t dent the consumer, household spending now faces a more formidable obstacle: job losses. Mounting layoffs in IT and allied industries have brought job creation to a halt. The U.S. economy has shed workers in three of the last five months — a cumulative decline of over 320,000 jobs. The Canadian economy has lost 35,000 jobs over the last three months.” Rubin forecasts another 600,000 job losses in the U.S., and as much as another 75,000 in Canada.

Then there is last week’s terrorist attack. “The horrendous impact of September’s attack will overstate the severity of the recession in the third quarter and understate it in the fourth quarter. The disruption of business and cancellation of airline travel could subtract a half to a full percentage point from third quarter U.S. GDP growth that was already heading for negative territory.”

The silver lining for markets is that the return to normal business conditions in Q4 will statistically look a lot more impressive when benchmarked against distorted third-quarter levels. Rubin says the more lasting impact from the attack will the economic stimulus provided by Washington’s increased spending.

Rubin notes that there is still every reason to believe that this will be a modest recession. “Job losses, while substantial, will still leave unemployment rates in both countries below what only a few years ago were considered full employment. However, there are equally compelling reasons to believe the recovery will be modest as well.”

“While the Canadian economy may do no worse than the U.S. on a peak-to-trough basis, it will underperform the U.S. during the second half of the year. The softer pace of inventory and job shedding north of the border so far will only place that much more pressure on second half employment and production,” he says.

“Even with the potential for more near-term losses, the TSE 300 and S&P 500 should offer investors better returns over the next 6-12 months than any other asset class out there.”

“The bad news is that North America is in recession,” concludes Rubin. “The good news is that’s its already half over.”