May 23, 2008 in Business

Hard to spot signs of economic recovery

Jeannine Aversa Associated Press
 
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Traders work at the New York Stock Exchange in New York. Associated Press
(Full-size photo)

WASHINGTON – With any luck, the second half of this year will be better than the rocky first half. The Federal Reserve chief hopes that is the case. So does President Bush.

For the rest of us mere mortals, it feels like the pain is getting worse.

When the economy begins to snap out of its funk, how will we know?

Like calling a recession, pinpointing the turnaround can be as much art as science. But economists agree there could be some strong signals to look for: A calmer stock market, an end to falling home prices and more jobs being created.

We’re not there yet.

Economic growth has slowed sharply and employers have cut jobs for four months in a row as problems in housing, credit and financial markets caused people and businesses to hunker down.

Still, there’s hope that the economy’s growth will begin picking up later this year.

Experts will be looking at a variety of barometers to mark the arrival of a rebound, but it’s by no means definitive.

One important indicator is the stock market. The turbulence that has engulfed Wall Street since last summer and hit a crisis point with the near collapse of investment firm Bear Stearns, has calmed somewhat, but the situation is still “far from normal,” Fed Chairman Ben Bernanke recently observed.

The Dow Jones industrial average, for instance, has clawed its way out of a recent bottom – of 11,740 – hit in March. The index is hovering at less than 13,000; its peak of 14,087 was set in October of last year. Financial markets remain fragile.

“The stock market recovery almost always precedes the economic recovery by about six months or so,” said Sung Won Sohn, an economics professor at California State University. “The exception was in the 2001 recession. Because of the dot.com crisis, the stock market was so badly battered it took a while for it to get back to full speed.”

In the current bout of economic troubles, though, fallout from the two-year-old housing collapse and subsequent credit and financial problems has driven the pullback by consumers, businesses and Wall Street.

That’s why economists – this time around – will be looking for signs of stabilization in the housing market. Specifically, house prices will have to stop falling or at least decline at a slower pace in many parts of the country. .

On Thursday, the Office of Federal Housing Enterprise Oversight said U.S. home prices fell 3.1 percent year-over-year in the first quarter, the largest drop in the 17 years of tracking the data.

House-price improvements also are important to a return to stability because house prices figure into the value of a host of securities, such as mortgage securities and derivatives.

And, improving house prices also would ripple through credit markets, making lenders more willing to make loans to people and businesses. That, in turn, would help bolster confidence in financial markets, economists said.

“Until the housing and credit markets improve, businesses and consumers will be doubting Thomases – there is no question,” said Brian Bethune, economist at Global Insight.

Forecasters at the National Association for Business Economics believe the worst of the housing slump and the credit crunch might end this year. The forecasters are hopeful that home sales will hit bottom this year. House prices, though, are still expected to drop this year and next. Some predict house prices won’t turn up until the spring selling season of 2010.

Analysts also will be looking for zooming gasoline and other energy prices to settle down. Gasoline is approaching $4 a gallon on average nationally and oil has blown past $130 a barrel, from $100 at the beginning of the year. Unlike the recessions in 2001 and 1990-91, people, more so than businesses, are bearing the brunt of the economy’s current woes.

“It is almost unprecedented in the post World War II period to have a recession be driven by a pullback in consumer spending, versus a pullback in business spending,” said Mark Zandi, chief economist at Moody’s Economy.com. “This one is unique in that sense. Businesses are pulling back but they are more reacting to consumers.” Another barometer for economic revival would be a turnaround in sagging consumer confidence.

Fed officials viewed economic activity as “likely to be particularly weak in the first half of 2008; some rebound was anticipated in the second half of the year,” according to Fed documents released Wednesday.

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