When the economy revives, how will the public know?

Jeannine Aversa
Associated Press
May. 23, 2008 12:00 AM

WASHINGTON - With any luck, the second half of this year will be better than the rocky first half. The Federal Reserve chief hopes that is the case. So does President Bush.

For the rest of us mere mortals, it feels like the pain is getting worse.

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 signals to look for: 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 their 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 be looking at a variety of barometers to mark the arrival of a rebound, but it's by no means definitive.

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 of last year. 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 a while for it to get back to full speed," Sohn said. 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 be looking 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 the spending.