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It's a recovery, yes, but an achingly slow and fragile one.

On the both sides of the border, officials are warning that while the economy is inching out of recession, it has yet to gain any serious traction.

Just a day after the Bank of Canada warned that the strong dollar was taking the steam out of the rebound, Prime Minister Stephen Harper said that there are signs of a "budding recovery" but that Canada could still see more job losses. And much depends on the spillover from the United States, where the latest report from the Federal Reserve Board pointed to a weak turnaround.

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Mr. Harper's comments, to a business audience in Toronto, came just hours after the U.S. Federal Reserve warned in its Beige Book that consumers still are not spending much, there is little demand for bank loans, and the construction industry is still depressed despite generous tax breaks and massive stimulus. "Virtually every reference to improvement was qualified as either small or scattered," the Fed said in the monthly collection of anecdotal reports from its regional reserve banks.

The comments show how economies around the world are grinding toward recovery. Analysts appeared surprised by the Fed's generally downbeat tone, and the Dow Jones industrial average, which had been up for most of the day, turned negative, falling 92.12 points to 9949.36.

In Toronto, Mr. Harper said Canadians should be optimistic but not overly confident, and he is looking for a rebound in private sector spending as a signal.

"We've had two consecutive months of net job creation in this country, but, frankly, that's not necessarily yet a pattern," the Prime Minister said. "We could still see some job losses."

Mr. Harper said his biggest concern is how the recovery plays out in the United States, so closely linked to Canada that the spillover effects are mighty, and he did not rule out a so-called double dip recession.

"We shouldn't kid ourselves," he said. "We were pulled into this recession by events outside our borders."

Mr. Harper also warned that it's too early for major economies to begin scaling back stimulus spending.

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The Fed report belies other recent evidence the U.S. economy might be coming around, including another batch of big profit numbers from major U.S. banks plus last week's encouraging consumer spending numbers.

"The report seemed to damn the U.S. economy with faint praise," remarked TD Securities analyst Eric Lascelles.

Nomura Securities chief economist David Resler said it's apparent the Fed sees the recovery as "still quite fragile."

The Fed report coincided with another batch of big third-quarter profit numbers Wednesday from some of the largest U.S. banks, including Morgan Stanley, Wells Fargo & Co., and U.S. Bancorp.

"Banks are in full recovery," said Gary Townsend, a former bank regulator and now chief executive officer of Hill Townsend Capital, a hedge fund based in Chevy Chase, Md.

Indeed, the vast majority of the big U.S. banks are racking up surprisingly large profits as they emerge from the darkest days of the credit crisis.

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The true health of the banking sector remains a lot less certain. As the Fed's Beige Book highlighted, virtually all banks are continuing to suffer from rising loan losses, and demand for credit from both businesses and consumers is weak.

Indeed, with few exceptions, bank executives acknowledge loans losses are likely to continue rising well into next year.

And yet banks are clearly finding ways to make money in spite of the recession.

And the main reason appears to be the trillions of dollars worth of easy money coursing through the financial system from the Fed, the U.S. Treasury Department and other federal agencies. Low rates on that credit allows banks to make handsome trading profits.

"It's government policy to have easy money right now," Mr. Townsend said. We don't know how high the Fed will take rates later. But I like what I see today."

For San Francisco-based Wells Fargo, which reported a record profit of $3.2-billion (U.S.) or 56 cents a share, the secret was its booming mortgage banking business. The results compare with a profit of $1.6-billion, or 49 cents, in the same three-month period a year ago.

Morgan Stanley also had good quarter, posting its first profit in a year. The investment bank said it generated most of its profit from trading and underwriting stock and bond issues. "We have a business that's been polished back to where it once was," Morgan Stanley chief financial officer Colm Kelleher told reporters. "All we're doing is retuning the engine."

Morgan Stanley posted profit of $757-million or 38 cents per share, on continuing operations, compared with a loss of $159-million, or $1.37, in the third quarter of 2008.

U.S. Bancorp also credited sharply higher mortgage underwriting fees for its better-than-expected third quarter - profit of $603-million or 30 cents per share, compared with $557-million, or 32 cents, in the year-ago quarter. Analysts had forecast 27 cents a share.

"I would consider this quarter to be much closer to business as usual than we have seen in quite some time," said U.S. Bancorp chairman and CEO Richard Davis.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More

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