6 signs of an economic rebound

Every cycle has its wild cards, but history shows there are some clues to a recovery that are pretty reliable.

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By Janice Revell, Money Magazine senior writer

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(Money Magazine) -- By now you've had enough of the endless gloom in today's economic news: record oil prices, slower home sales, deepening loan losses, disappointing corporate earnings. What you're really looking for at this point are a few signs of hope.

It's a certainty that the economy, the housing markets and the stock market have to bounce back sooner or later. If you could see that rebound coming, not only could you rest easier about everything from your job to your retirement, you could move forward confidently on all those financial plans you've put on hold until the way seemed clear.

You could, maybe, take a chance in the job market. You could think about trading up to a bigger home or downsizing to a place that better suits your needs. And even though you've stood unwavering by your investment strategy as the stock market tumbled - and you have, haven't you? - you could feel good once again about putting your money in something besides a chickenhearted money-market fund.

So what are the surefire signs that we're bouncing back? The only honest answer, of course, is that there are no 100% surefire signs. In every cycle there are wild cards that can trump even the best predictions.

On the other hand, history shows that some hints of renewal are far more reliable than others. At least one of them is worth watching in every market that matters to you, from stocks to real estate to jobs. Read further to find out where you'll find these harbingers of economic spring, why they work and how you can make the best use of them.

When will the economy get out of a rut?
  • Watch: Business sentiment
  • Current read: Recession's still on

While we won't know for certain whether we are in a recession - defined as a decline in gross domestic product for at least two quarters in a row - until later this year, most economists believe we are.

For starters, GDP growth slumped to an anemic 0.6% in late 2007. What's more, the measure that has been eerily prescient in the past decisively flashed "recession" just as the housing market peaked.

We're talking about the yield curve - or the relationship between short- and long-term interest rates. Long-term bonds usually pay more than short-term ones to compensate investors for locking up their money. When that relationship flips and produces what's known as an inverted yield curve, you can be pretty sure a slump is coming.

Since 1960, every time the yield curve, as measured monthly, has inverted (except once), a recession has followed. The last time this happened was July 2006. Unfortunately, the yield curve can't help you see the recovery that's bound to be over the horizon. What can?

What to watch: The most important clue may lie in the minds of business leaders, says Nariman Behravesh, chief economist at Global Insight. The more upbeat companies feel about their prospects, the more likely they are to expand and hire, which in turn lifts consumer confidence, sparks spending and boosts economic growth.

To get a read on business sentiment, Behravesh suggests looking at the Institute for Supply Management's nonmanufacturing index, a monthly survey of conditions in the service sector, which accounts for 80% of jobs. A reading below 50 is typically regarded as a recession signal; the lower it goes and the longer it stays down, the more severe the slump. Once it returns to 50-plus territory, a rebound is likely.

During the brief recession of 2001, the index dropped below 50 just as the slowdown started and hovered between 45 and 50 for most of the next eight months. A month before the recession ended, the index rose sharply to just under 50 and soon stabilized in the low 50s.

For a second opinion: Look to the real estate market. "Housing is what got us into this recession," says Gus Faucher, director of macroeconomics at Moody's Economy.com. "In terms of what's going to get us out of it, we're going to be looking for a bottom in the housing market."

How do you spot that? Brush up on supply and demand. Historically, the inventory of homes on the market - particularly how many months it would take to sell it off - has soundly predicted home prices. Six months of inventory appears to be the sweet spot. In 1996 inventory fell below six months and dropped for much of the decade - and prices climbed steadily.

What they're saying now: A mixed outlook. For March the ISM nonmanufacturing index stood at 49.6 - up from the precipitous drop to 44.6 in January but still below 50 for the third straight month.

"If the index goes to 40 and stays there, we're looking at a much deeper recession," says Behravesh. "If the number goes back up to 50 and remains at those levels, that's definitely a signal that things are going to get better." Housing inventory, however, has recently hit nearly 10 months' worth - bad news for prices and growth.

To keep track: The ISM nonmanufacturing index is released on the third business day of every month. It's widely reported in the press; or you can find the releases in the ISM Report on Business section of the Institute for Supply Management's Web site.

As for the real estate inventory yardstick, the National Association of Realtors puts out the data monthly (usually between the 22nd and 25th). Look in the Research section on its Web site.

The wild cards: As Federal Reserve governor Kevin Warsh recently quipped: "If you've seen one financial crisis, you've seen one financial crisis." Indeed, this slowdown has seen a massive credit crunch, a free-falling dollar and record oil prices. At the same time, exports to China and India are helping U.S. businesses offset weakness at home. Any or all of these factors could cloud the rebound picture.

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