The US employment report was downright ugly. Consensus for November non-farm payrolls was a decline of 350,000. Reality was 533,000, the largest decline since December 1974. And October non-farm payrolls were adjusted from a loss of 240,000 to a loss of 320,000; September non-farm payrolls were adjusted from a loss of 284,000 to a loss of 403,000. The unemployment rate in November increased from 6.5 percent to 6.7 percent, under the consensus estimate of 6.8 percent.

The Canadian dollar moved lower on the employment news, extending a horrible week kicked off by the political tussle in Ottawa–entertaining in a tragicomic sort of way, nonetheless that additional uncertainty was the last thing the market and investors needed.

The November employment reports are the first test of what’s happened in the wake of the Sept. 15 Lehman Brothers bankruptcy and ensuing credit crunch. It’s clear now that the global lending freeze has exacerbated what was already a deteriorating situation.

Consumer confidence is at a quarter-century low, according to the Conference Board of Canada. And it’s all about uncertainty.

But with the exception of the rout in equity markets that began in late September, and the fall in commodity prices, most of Canada’s economic indicators had held up relatively well. Canada produced a lot of stuff in the third quarter, activity that pushed GDP growth to 1.3 percent. Final demand figures suggest, however, that not a lot of that inventory was sold. The cure for that particular excess is production freezes, and that means job cuts.

The third quarter GDP number is, by now, old news; it was pushed upward somewhat by record commodity prices in the early part of the period, before the worst of the credit crunch. A strong July accounted for virtually all the output gain, with indicators easing over the course of the quarter.

Still, 1.3 percent growth beat the rest of the G-7. But there’s clear evidence that Canada is about to go through a milder version of what’s plagued the US since January, where a million jobs vanished in 10 months. We’re not talking about the 1930s, and the jobless rate of the ’90s–above 10 percent–still seems a worst-case scenario.

That Canada’s November employment report showed the most job losses in 24 years makes sense in light of the total lockup in global credit markets. As John Maynard Keynes and Milton Friedman would certainly agree, you’ve gotta get lending going again before our credit-based economy can grow.

Addressing credit and insolvency problems, and establishing easy short-term money for qualified borrowers, is a necessary condition for recovery; it’s no use creating demand for credit if there’s no supply.

Canadian credit markets haven’t been as frozen of those in the US or EU, but they’re not immune. Finance Minister Jim Flaherty announced one measure in last week’s economic statement that was lost amid the kerfuffle over ending federal financing of political parties (see below): a legislative change to allow the Canadian government to inject capital into the banks if needed, a program that looks a lot like the US Treasury Dept’s Troubled Asset Relief Program. Canadian banks tend to have much higher capital ratios than their US and European counterparts. But they, too, have been reluctant to lend, and they’re exposed to bad assets through their US holdings.

The Bank of Canada and the Finance Ministry have also arranged to buy up Canada Mortgage and Housing Corp insured mortgage pools, to provide more liquidity to the banks and have arranged to guarantee wholesale lending. But they’ve shied away from deposit guarantees and other measures. With declining property and equity transaction activity, banks profits are likely to slow, even if they are the soundest global banks.

Providing the means to maintain an adequate number of qualified borrowers who demand credit–keeping people employed, essentially, to prop up aggregate demand–is what a stimulus package is all about. And Prime Minister Stephen Harper will have an opportunity to present a budget in January that includes such measures after Governor General Michaelle Jean granted his request to prorogue Parliament yesterday.

Mr. Harper made the request after the three parties in opposition–the Liberals, the New Democratic Party and the Blob Quebecois–came together out of convenience, ambition and narrow self interest to formally request Harper’s removal and the installment of a Liberal/NDP coalition government.

Markets hate uncertainty, and this particular uncertainty is, or should have been, totally unnecessary. Mr. Harper has said he supports a stimulus plan, and said he’d spend into a budget deficit if necessary.

Parliament will reconvene Jan. 26, and the budget for the new fiscal year will be presented Jan. 27. The opposition parties could vote “no” on budget measures, and because budget votes are by definition matters of confidence, rejection would mean a new election. The coalition’s main goal was rapid response to the economic situation, via a CAD30 billion stimulus. Voting down the government in January or February would only further delay stimulus, which Mr. Harper and Finance Minister Jim Flaherty have promised to include in the budget.

It would then be pointless–stupid, really–for the coalition to oppose a budget that includes a significant spending package. The coalition’s premise is to get a stimulus package passed, pronto. If they bring the government down on a vote over a budget that includes significant federal stimulus spending, they’ll look like idiots.

Given the headwinds for the global economy and the impact on Canada, now might actually be the time for some countercyclical spending or providing funds to the provinces to do so. The government has committed to including fiscal spending measures in the budget it will announce Jan. 27.

This coalition must recognize that pursuing its own murky ends may in fact derail any attempt to provide a timely stimulus.