Business

When economy revives, how will we know?

With any luck, the second half of this year will be better than the so-far rocky first half.

But when the economy begins to snap out of its funk, how will we know?

Like calling a recession, pinpointing the turnaround can be as much art as science. Economists agree there could be some strong signals to look for, however: A calmer stock market, an end to falling home prices, and more jobs being created.

We're not there yet.

The economy, by all accounts, is suffering through difficult times, although some economists have backed off recession talk. Economic growth has slowed sharply, and employers have cut jobs for four months in a row as problems in housing, credit and financial markets forced skittish people and businesses alike to hunker down.

Even though a Labor Department report Thursday showed the number of newly laid-off workers filing for unemployment benefits dropped last week to the lowest level in a month, claims remain high enough to indicate the labor market is sluggish.

Still, there's hope that the economy's growth will begin picking up later this year.

Experts will look at a variety of barometers to mark the arrival of a rebound, but it's by no means definitive or foolproof.

One important indicator is the stock market. The turbulence that has engulfed Wall Street since last summer and hit a crisis point with the near collapse of investment firm Bear Stearns, has calmed somewhat, but the situation is still “far from normal,” Fed Chairman Ben Bernanke recently observed.

The Dow Jones industrial average, for instance, has clawed its way out of a recent bottom – of 11,740.15 – hit in March. However, the index hovering just under 13,000 is well below its peak of 14,087.55 set in early October. Financial markets remain fragile.

Investors are looking ahead – at the economy's prospects and individual businesses – when they make investment decisions and are buying or selling stocks.

“The canary in the coal mine is really financial markets,” said Sung Won Sohn, an economics professor at California State University. “The stock market recovery almost always precedes the economic recovery by about six months or so. The exception was in the 2001 recession. Because of the dot-com crisis, the stock market was so badly battered it took awhile for it to get back to full speed.”

By his count, after the 2001 recession, the stock market lagged the economic recovery by one year.

In the current bout of economic troubles, though, fallout from the 2-year-old housing collapse and subsequent credit and financial problems has driven the pullback by consumers, businesses and Wall Street.

That's why economists – this time around – will look for signs of stabilization in the housing market. Specifically, house prices will have to stop falling or at least decline at a slower pace in many parts of the country. As many Americans have watched their single-biggest asset – their home – shrink in value, they have become much more cautious in spending, contributing to the economy's slowdown.

On Thursday, the Office of Federal Housing Enterprise Oversight said U.S. home prices fell 3.1 percent year-over-year in the first quarter, the largest drop in the 17-year history of tracking the data.

House-price improvements also are important for a return to stability because house prices figure into the value of a host of securities, such as mortgage securities and derivatives.

And, improving house prices also would ripple through credit markets, making lenders more willing to make loans to people and businesses. That, in turn, would help bolster confidence in financial markets, economists said.

“Until the housing and credit markets improve, businesses and consumers will be doubting Thomases – there is no question,” said Brian Bethune, economist at Global Insight.

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