How to know the recession is over

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What specific metrics should we look at to tell the economy is really on the mend?

Everyone I bump into has become an “economist” these days. Our neighborhood mailman laments the “worse than expected decline” of the equity market. The UPS guy, too, has ideas about resolving the housing crisis. A friend “knows” when the inflation will hit. Another has an alternative stimulus plan that he believes is far superior than President Obama’s economic recovery program. And everyone seems to have his or her prognostication about when the green shoots of recovery will start to sprout.

We all have a stake in a quick recovery, of course, so people are into it—following the news and Sunday talking heads much more closely. Oftentimes, we believe what we want to believe: Many in the political right and their consuming aversion to Obama see a half-empty glass, faulting the new president for every failing. Pockets of successes, on the other hand, are readily welcomed by those of moderate to liberal sympathies as signs that hope and accountability are now unmaking the damage caused by many years of greed and irresponsibility. If the net effect is greater consumer confidence, people will spend more and thus help stimulate the economy. However, unless the foundation of America’s colossal economic superstructure is replaced with a solid slab, instead of the quicksand created by the unbridled market frenzy and fiscal irresponsibility in the last decade or two, no amount of consumer hopefulness could turn things around.

What specific metrics should we look at to tell the economy is really on the mend? Economists look at three critical measures: level of housing supply, use of temps, and business sentiment.

Homes for sale

The bursting of the real estate bubble is what triggered the current recession, so economic recovery requires that the US get out of the housing rut. The key measure to watch is data on the supply of unsold homes, which should be at about six months. Unfortunately for America, the National Association of Realtors (www.realtor.org) recently reported a looming inventory that will require 10.2 months to sell, the worst glut since November. This means prices will continue to fall to work off the excess inventory. With unemployment still climbing, it is counterintuitive to expect home prices to stabilize any time soon.

Temps needed

To accommodate any uptick in business activity, companies tend to hire temps first, waiting to make sure the recovery is for real before committing to permanent workers. The American Staffing Association index (www.americanstaffing.net) shows hiring levels remaining mostly flat this year. The current index of 72 is 28 points lower than the same period last year. According to financial journalist Janice Revell, a full recovery requires a continuous rise in the index for at least three consecutive months.
 
To expand or not to expand

Business sentiment is measured by the Institute for Supply Management’s non-manufacturing index (www.ism.ws), which indicates whether companies are ready to expand and thus boost economic growth. It is a great sign if the index hits 50 and stays there, according to economist Nariman Behravesh. Currently, the picture is not good but improving: it was 44 in May, up from 40.8 in March.

With the economic indicators still pointing to a struggling economy, it’s no wonder why the stock market rally is not exactly in full throttle. But the important thing is that the trajectory is upward, however slightly, and that the recovery is propped by strong fundamentals, not buoyed by just another economic bubble.

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