What is the sign the economy is recovering?

John W. Schoen Senior producer • Profile • E-mail

The latest news on job losses, house prices and the stock market has a lot of readers asking some very hard questions. Like when is the economy going to recover? And when will the stock market start going back up? We have no idea. But here are some things to keep an eye on as we keep slogging through the roughest economy in at least a generation.

While we are in the midst of a very slow economy, what do past recessions tell us about the recovery? When it does rebound, does it take off quickly? Come back slowly? Does the stock market react first? Or real estate? Do companies start to hire again soon? Do banks start to lend money again fairly quickly? What will be signs to economy is turning around?
— Dave, Youngstown, Ohio

If you want to pick one set of economic statistics to watch, keep an eye on the job numbers — both the monthly employment report and the weekly numbers showing how many people sign up for unemployment insurance for the first time. At the moment, these are the most worrisome because they seem to be accelerating downward. The next monthly reading comes this Friday. Some economists are talking about job losses of as many as 750,000 in February,  up from 598,000 in January. Last week, 667,000 signed up for unemployment benefits, the most in one week in a quarter century, bringing the total to about 6.5 million.

The problem now is that as GDP contracts, the workforce doesn’t shrink accordingly. Once the contraction is over, there will be millions more people out of work than when it began. When the economy begins growing again, it will take time for those unemployed people to be absorbed back into the workforce. It’s impossible to know how long that will take, but even during “boom times,” the economy was barely creating jobs fast enough to keep up with the growth of the workforce. Until everyone has a job who wants one, the consumer spending power that makes up 70 percent of the economy (or did before the downturn began) will remain weak.

Recent historical comparisons offer limited guidance. Since World War II, we’ve become accustomed to economic downturns that last, at worst, 16-months or so. The 1980-82 recession (really two back-to-back recessions) ended with a sharp upward recovery. But that was largely because the recession was induced by the government, which jacked up interest rates as high as 20 percent to stamp out inflation. Once the Fed eased off on rates, the economy came back to life, and pent-up demand sent the stock market soaring.

This contraction is different. Wall Street borrowed real money from private investors, with a promise to pay it back, and then lent it to people who can now never pay it back. Some of those lenders thought they’d get their money back. Many more knew the housing boom was a house of cards but kept lending anyway because they thought they could shift the risk to investors. Some borrowers were foolish. Some were prudent but are being hurt by the sharp, ongoing drop in the value of their house, which makes up a big chunk of most Americans’ wealth.

When the contraction stops — maybe sometime next year — we may begin growing again. (Most economists seem to have quietly abandoned last year’s widely-held “second half 09 recovery” forecasts.) But when growth does kick in, it will be slow and from a much lower base. It’s entirely possible we won’t see the Dow hit 14,000 — or our houses recover their 2007 value — in my lifetime (I’m 56).

Housing is probably the second most important indicator to keep your eye on. The goal of the government’s $75 billion housing relief package is to stop as many of the 10 million foreclosures expected by 2010 as possible. The Obama administration concedes many homeowners won’t be helped. If even half of those 10 million foreclosures take place, that would more than double what we’ve seen since the crisis began. As we’ve reported, without aggressive efforts to stop them, these foreclosures may drag on through 2011, which will preclude any recovery in the housing market before then. Without a housing recovery, you can’t have a consumer spending recovery.

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