(MONEY Magazine) – Slowly, oh, so slowly, the U.S. economy is reviving. The downturn, in its 11th month, is now as long as the average recession since World War II. But some economists say that before this slump ends, it will rank as the third longest -- after 1973-75 and 1981-82, both of which lasted 16 months. Be that as it may, a recovery is under way: -- After falling for six straight months, the leading economic indicators rose 1.2% in February and another 0.5% in March. -- New-home sales increased 1% in March after an 18.6% surge in February, though the pace of housing starts, 900,000 units at an annuallized rate, is well under September's 1.1 million figure. -- Although Detroit's Big Three automakers posted horrific combined losses of $2.3 billion for the first quarter, economists think car sales are bottoming out. -- And ample cheap money -- the best tonic for tough times -- has been all but guaranteed by the Federal Reserve Board's third discount-rate cut in five months, which pushed down Treasury bill yields to 5.5%, their lowest level since 1987. If you're starting to think it may be time to break out the champagne, go ahead. But reach for Freixenet, not Veuve Clicquot. We do not see a roaring comeback. On average, the U.S. economy has grown by a robust 5% to 6% in the year following a recession. This time around, it's hard to imagine more than 3%. The problem is consumer spending, which makes up two-thirds of the economy. Consumers went on strike last year before we rolled over Iraq, but their confidence has been improving. Our MONEY/ABC Consumer Comfort Index climbed to -29 in April from a record low of -43 last October, before slipping back a bit in May. Many families remain strapped for cash, however. With employment likely to grow only 2% or so over the next year and wages rising perhaps one percentage point faster than inflation, growth in consumer spending can't be much more than 3%, unless Americans go on a borrowing binge. And that's not likely. This recession has been caused by financial excesses. With the ratio of household debt to income more than twice what it was in the 1950s, most consumers are trying to cut back. Consumer credit declined in March for the fourth month in a row. Don't look for the other traditional economic engines -- big business and big government -- to save the day either. A recent FORTUNE poll found that only 25% of the 160 high-level executives surveyed were pursuing aggressive business policies. And the government will be raising taxes, at least at the state and local levels. What does all this add up to for investors? Historically, after three discount-rate cuts, stocks go on to post gains of 11% to 50% during the next year. This time around, bet on the lower figure. Here's why: the stock market has already run up on falling rates, with the Dow climbing from 2470 in January to 3004 in April. In the process, institutional investors spent their money: cash in their portfolios was down to around 5% in May, the lowest level since 1980.

We think the Dow could climb another 10% to around 3200 this year. But there is a significant danger of a 20% drop that would take the Dow back down near its October low of 2365. So this is a time to wait for the recovery to take hold. Our cover package, beginning on page 84, describes the safest ways to maintain a long-term portfolio that can earn a 10%-plus annual rate of return with minimum risk. If you are aiming for more growth, skip to the story on page 120 that profiles three of today's hottest mutual fund families. They are run by managers who have sailed through risky markets before and gone on to post stunning returns.

BOX:

THE ECONOMY A recovery is under way, but real gross national product will grow only 3% over the next year, compared with the 5% to 6% rebounds that followed most recessions.

STOCKS The Dow could rise 10% to around 3200, but there's a danger it will drop as much as 600 points within the next year. Minimize your risks by aiming for long-term returns of 10% a year.

BONDS Interest rates are as low as they are likely to go for now. Therefore, protect yourself against any uptick in rates by sticking with issues maturing in five to 10 years, which currently yield 7.5% to 8%.