Important indicators to economic recovery

Have we hit bottom yet?

When it comes to the economy, nobody knows for sure. The news remains mixed, and conclusive answers won’t be available for months.

Still, several indicators could help point to an eventual recovery. Here are some things to watch for:

Housing stability

The slump in residential real estate was the catalyst for the credit crunch and weak economy. It also has undermined consumer sentiment, since homes remain the largest asset for most Americans.

“It’s a lynchpin of this cycle because the longer the housing market remains depressed and the deeper home prices fall, the more stress will build on the balance sheets of banks and consumers,” wrote Kelly Bogdanor of RBC Wealth Management.

Before the skies clear, housing needs to improve. Bogdanor is watching for telltale signs like rising prices and an easing of the supply of homes for sale, which now stand near a record high.

Anthony Sanders, a finance and real estate professor at Arizona State University, thinks prices will firm earliest in the most desirable urban areas, and he thinks it may have started.

Fewer surprises

Investors hate it when skeletons fall out of the closet, yet the bones have been piling up from bailouts, bankruptcies and other blowups involving Countrywide Financial, Bear Stearns, IndyMac Bank, Fannie Mae, Freddie Mac and others.

Banks and other financial firms aren’t out of the woods yet. Troubled loans, writeoffs and losses abound. More banks are likely to fail. Gerard Cassidy, senior bank analyst at RBC Capital Markets, predicts 265 banks could go under from 2008 through 2010, nearly all of them small institutions.

FBR Capital Markets also paints a grim picture, with an expectation that nonperforming loans will remain troublesome through year-end amid fears that problems might spread into commercial and industrial loans.

But they also say investor pessimism toward banking and bank stocks might have become overblown.

Leading indicators

One of the best divining rods of future performance is a compilation of key statistics known as the index of leading economic indicators, which tracks time-sensitive factors such as building permits, supplier deliveries and manufacturer orders. These factors don’t work perfectly but, taken together, provide a fairly good glimpse on where things are headed.

For roughly the past year, the leading indicators have been bouncing around like a ping-pong ball – up one month, down the next. The index has dropped the past two months, although by minuscule amounts. A notable uptick here would be a positive signal, but it hasn’t happened yet.

Rising stock prices

The stock market also could prove a good harbinger of an eventual recovery. Investors tend to anticipate corporate profits and economic conditions six to nine months down the road. Just as the market peaked late last year before some of the worst news hit, stocks could push higher before the all-clear signal comes.

In six of the past nine bear markets, stocks in the Standard & Poor’s 500 index rallied within six months of first hitting bear territory, according to Bogdanor. Those gains ranged from 4 percent to 28 percent.

Consumer sentiment

Nearly everyone seems pessimistic these days. Sentiment indicators like that tracked by the University of Michigan now stand at or near their lowest points in decades.

Some consumer problems, such as debt overhang, will take years to work through. But other factors can change much more quickly. For example, moderating gasoline prices would likely boost public spirits, and so would an easing of food-price pressures.