Road Map For Recovery Where to look for the signs that good times are ahead
By Lou Dobbs

(MONEY Magazine) – So much for the recovery of 2001. The terrorist attacks of Sept. 11, combined with the already slowing economy, have put hopes for a rebound on hold until well into next year. But with so many variables at work--from the aftermath of New Economy excesses to the impact of the attacks, the anthrax scares, the conflict in Afghanistan and the weekly deluge of conflicting economic data--figuring out what's going on in the economy is harder than ever. How can investors know when we're finally on the road to recovery? There's no one way, of course, to pinpoint the early stages of a rebound, but there are certain indicators that are more likely to signal an upturn. Some of the signs may be obvious; others are probably less familiar to nonprofessional investors. But all are worth examining as we close out the year and look ahead to what we hope will be a peaceful and profitable 2002.

Consumer confidence. Economists agree that the consumer is key to this recovery. Why? Businesses, still trying to work through excess capacity created during the Internet and technology boom, are likely to run as lean as possible for the foreseeable future. As a result, the experts say that if you're searching for signs of recovery, look to the consumer. The best-known gauge of consumer confidence is, of course, the Conference Board's consumer confidence index, released monthly. In addition, the University of Michigan releases a monthly consumer sentiment index. Finally, for a more frequent fix, MONEY, along with ABC News, releases a confidence survey every Wednesday. The Conference Board's index fell to a seven-year low in November. The University of Michigan's survey actually rebounded slightly. But both indexes have fallen dramatically over the past few months. As of this writing, the MONEY/ABC News survey has stabilized somewhat, after dropping sharply in early October. However, nearly half of those asked believe the economy is still deteriorating.

Jim Glassman, senior U.S. economist at J.P. Morgan, believes retail sales, auto sales and home sales are better gauges of consumer confidence than the traditional consumer confidence indexes. He points out the discrepancies in September and October data, which showed consumer confidence tanking but retail and auto sales rebounding sharply. "The problem is there's a difference in how we feel and what we do," says Glassman. "People don't buy cars and houses unless they feel okay about their own condition." On retail, he says the best indicator is the government's monthly retail sales report. The government's number is based on a broader sampling of the retail sector than the same-store sales figures, for example. On housing, beyond figures for new- and existing- home sales, watch the number of people applying for a mortgage to purchase a home (vs. mortgage refinancings). These numbers are broken out weekly by the Mortgage Bankers Association in its purchase index.

Employment data. Along with confidence, the other critical indicator of consumers' willingness to spend is the employment data. For timeliness, the weekly report on claims for first-time unemployment benefits is closely scrutinized. But while this survey is helpful because of its ability to provide a snapshot of the job market, its results are notoriously volatile. Which leads to the question: What's the best way to put economic data in practical perspective?

Lakshman Achuthan of the Economic Cycle Research Institute says to remember the three Ps. "Look at how pronounced, how pervasive and how persistent the move is," he says. For weekly jobless numbers, Achuthan needs to see claims trend up for at least eight weeks before they'd pass his persistence test. More difficult, according to Achuthan, is measuring the pervasiveness of trends in the employment market. For this, he suggests turning instead to a lesser-known component of the monthly jobs report--the diffusion index of employment change. In compiling this index, the government basically divides the entire economy into around 350 industries. It then compares the number of industries that are hiring with the number that are firing, thus indicating the pervasiveness of any improvement or weakening in the job market. Right now, we have pervasive weakness. When we begin to see a turnaround in this indicator, there's a good chance we're moving closer to recovery.

Glassman says to pay close attention to workweek data. "Sometimes a good signal that the picture is changing is when the workweek starts to expand," he says. "That'll tell you it won't be long before you start to see new hiring."

Commodity prices. Falling commodity prices often signal a recession, because demand isn't keeping up with supply. So rising prices can mean that recovery is in the offing. Along with the well-known CRB futures index, which is a composite of commodity prices, keep a close eye on copper, says Ed Yardeni, chief investment strategist at Deutsche Bank Securities. "Copper is one of the most widely used metals. It goes into cars, it goes into homes and home construction," he says. After falling sharply, copper prices have recently rebounded to a three-month high.

Stock prices. The stock market is one of the best barometers of confidence and, therefore, recovery. Yardeni says it's a good sign when the market is doing well in the face of bad economic news. In particular, look for strength in some of the more cyclical stocks, such as basic materials like chemicals and paper. Or see if some of the retail stocks are doing well, even though retail sales may be suffering. Says Yardeni: "If you see a disconnect between the market doing well and the bad news, the market's usually right, because it usually anticipates the turn in the economy by six months."

Leading indicators. For investors who don't have the time or inclination to track all these variables, Achuthan suggests checking out the Economic Cycle Research Institute's weekly leading index (WLI) released every Friday. (In case you're unfamiliar with the institute, its founder, Geoffrey H. Moore, was once Alan Greenspan's statistics teacher.) The WLI contains seven major economic indicators, including mortgage applications for purchase, money supply, sensitive industrial prices, bond yields, bond-quality spreads, stock prices and weekly jobless claims. As of this writing, the index is trending higher, but it is still too soon to say if it is signaling a rebound.

The final signal on the economy's future direction is one for which--unfortunately--there is no handy chart or release date. I'm speaking about, of course, the war in Afghanistan. While we are well on our way to victory against the Taliban, the uncertainty of a military campaign inevitably weighs on the economy and the markets. When the conflict is resolved, yet another major roadblock will be removed.

Lou Dobbs is the anchor and managing editor of CNN's Lou Dobbs Moneyline.