With a housing crisis, credit crunch and volatile stocks, our U.S. neighbours may well be heading towards a recession.

BMO Capital Markets predicted Wednesday the United States is heading towards a mild recession -- one more in an increasingly loud chorus of voices that thinks the world's biggest economy might be contracting.

The Bank of Canada followed up Thursday by saying the U.S. economy would barely grow in the first half of this year and could easily tip into recession. While the central bank lowered its growth forecast for the local economy, it also predicted that Canada will avoid a recession.

Should we be worried?

A U.S. recession doesn't necessarily mean a recession here. Derek Burleton, vice-president and director of economic studies at the TD Financial Group, told CTV.ca that the U.S. had a mild recession in 2001 and while Canada slowed down, its economy didn't fall into recession.

A similar scenario is expected to unfold this time.

Retiring Bank of Canada governor David Dodge said Thursday that his institution sees Canada's economy as growing by 1.8 per cent this year, rebounding to 2.8 per cent in 2009.

"We never know these things until we get the data, and the data doesn't come until after the events," Bernie Wolf, professor of economics at York University's Schulich School of Business, told CTV.ca.

While Canada will likely avoid a recession, economists are monitoring several symptoms that could pinpoint an accurate diagnosis of our country's financial health in the coming months:

1. U.S. demand

David Wolf, vice president and head of economics at Merrill Lynch Canada Inc. (incidentally, Bernie's son) told CTV.ca that Canadian consumers are the bedrock of Canada's economy, with their spending accounting for at least 55 per cent of economic activity here.

However, exports account for about one-third, and the U.S. for almost 80 per cent of that total.

"We do think that the U.S. has entered recession, and Canada sells fully one-quarter of its entire national output to the U.S., so that is certainly a grave concern," he said.

If American consumers and businesses start buying less, that will eventually be felt here.

Burleton noted Statistics Canada considers the U.S. Conference Board's leading indicator when developing its own composite leading indicator.

On Thursday, Statistics Canada reported: "The composite leading index decelerated in the last three months of 2007, mostly due to weak US demand for manufactured goods."

2. Pressure on financial markets

The stock markets have been volatile in recent days, but David Wolf said there are other pressures. There is a credit crunch that started with the U.S. subprime loan crisis but has since spread beyond to affect loans for businesses.

"That more tenuous financial environment is a challenge to the real economy as well," he said.

A slumping market can be an indicator of broader economic troubles, but Wolf said there isn't a strong correlation between the structure of Canada's stock market and the "real" economy where goods and services are produced.

"The reason is Canada's stock market is dominated by three areas: Financials, materials and energy," he said. The latter two are commodities that are much more influenced by world factors, not what's happening in Canada, he said.

While commodities form a relatively small part of the Canadian economy, they are a large part of the S&P/TSX composite index, he said.

But the stock market does have a "feedback" effect. "If people feel poorer because of this and pull back on their spending, that can have real economic effects," he said.

3. Housing

This affects the economy in two ways. Rising values -- like rising stocks -- create a "wealth effect," making people feel richer, which has a modest effect on spending.

In the U.S., the bloom is definitely off the housing rose.

David Wolf said in his firm's opinion, houses in Canada have gone from being severely undervalued to appropriately valued. This means there's no bubble to pop here like there was in the United States.

"We don't think house prices are going down," he said, adding the conditions for a U.S.-style collapse don't appear to be on the horizon.

In fact, Burleton said that residential building permits are a key leading indicator for construction and that "construction has provided enormous offsetting benefits to weakness on the export side."

If Canada starts seeing a sag in permits and housing starts and sales, that will be a strong sign times are getting tougher.

4. Employment

Because consumer spending drives so much of the economy, Burleton said a good indicator of where the economy might be heading is unemployment data. In the U.S., TD particularly looks at the number of initial jobless claims.

In Canada, the jobs situation is among the best in decades, but most recently, the hiring is being conducted mainly by the public sector.

"I think the stagnation in private-sector hiring is a warning sign," David Wolf said.

5. Other indicators

In compiling its composite leading indicator index, Statistics Canada monitors all of the above, plus the following:

• The money supply
• Average manufacturing workweek, hours
• New orders, durables
• Shipments/inventories of finished goods
• Furniture and appliance sales
• Other durable goods sales

The index dropped 0.1 per cent in December, something that hasn't happened since 2001. But it's been trending down since May and has been flat for two months.

Even if that looks worrisome, Burleton jokingly noted that economists have predicted 10 of the last four recessions.

"Using the word (recession) tends to scare people," Bernie Wolf said, adding that a shallow recession and a significant downturn will feel about the same.