What Goes Down Must Come Up! Real Economic indicators

By Martin Brown

There is less money in your pocketbook. Your savings account is a lot lighter, too. Want some good news? These four leading indicators will let you know if—and when—the economy is on its way back up.

At a certain point all market watchers come to the same conclusion: markets that are riding high will fall and markets that are down will eventually rise. As you have seen in this most recent economic downturn, there is often little agreement on what indicators show us is a sign of recession or for that matter, recovery.

The employment picture is one such economic indicator. The increasingly anemic job market has been a good indication that our economy was sliding toward a recession. Still, incremental growth in the job market in the coming economic quarters may not be a reliable indicator that the economy has indeed turned around, and is now headed in the right direction.

So what are reliable indicators that we are heading out of the doldrums and back to an expanding, read growing economy?

A gross national product that has expanded at approximately a half point in recent months, and recently lost ground, may not be an official recession but it’s very, very close.

Unfortunately a dozen different economists will give you a dozen different answers to the question of what indicators are key to signaling an end to the economic downturn. Therefore it seems like a good time to take a look at those many different forecasts and attempt to distill all this down into what appears as the most often mentioned signs that our economy is once again headed in the right direction.

First, it’s hard to imagine a healthy recovery in the US getting off the ground without some degree of stabilization in the price of oil. It’s become a weekly routine to see a market rally quashed by another bolt in the per barrel price of oil. The silver lining in all this is the creative burst that has been unfolding in recent months across the American landscape in favor of alternative sources of energy. Just as the political gamesmanship involving off shore drilling will not change the immediate pricing crisis. However, neither will the plug-in hybrids of 2010 end the recession of 2008.

The uncontrolled upward spiral of oil prices warps an economy that depends on fossil fuel in a way no other nation in the world does. Routinely we grow a head of lettuce 1,500 miles or more from where it is consumed. We have been a nation tipsy on the price of cheap oil for 25 years and readjusting our economy to $4 per gallon gas and $5 per gallon diesel is no small trick. That said, there won’t be a real turnaround in the economy until fuel prices stabilize.

That doesn’t mean a return to $2 per gallon gas. It simply means an oil commodities market that is not taking dramatic and sudden upswings in its daily pricing.

Second, the housing market must settle down. Americans can handle the idea that there home is worth today the same or slightly less than it was a year ago. But in many major metro areas, home values have fallen 25% or more. This, for good reason, has a lot of consumers hyper-ventilating.

A stabilization in home prices will be signaled by two factors: one, housing inventories will fall below a six month supply, and two, when housing construction permits are once again on the rise.

Third, the stock market goes back up. The market, if you haven’t heard, is in bear territory, having declined 20% in value from its peak. The Fed’s steady diet of rate cuts, however, should begin to yield increasing stock prices as corporate earnings become increasingly attractive compared to low share prices. As a general rule, stock prices follow earnings, and if that holds true again we should see a rising market come the last quarter of this year.

Fourth, the credit crunch begins to ease. Banks are still in a hyper-cautious position regarding a wide array of borrowing, especially consumer and home equity loans. I suspect this will be the last indicator to swing back into a positive area, although a rising stock market should help jump start the financing engine even prior to price stabilization in the housing market.

When will all this occur? 

Here’s my guess, based on the current chatter between our nation’s top economists: By the first quarter of 2009 we’ll see a turn in the right direction, with a recovery fully under way by the fourth quarter of next year.

Hopefully energy prices will stabilize over the next three months, and begin heading downward. The housing market will end its free fall, and begin a collective recovery by the second quarter of 2009. Stock prices will rally back starting in the last quarter of this year and continue a slow but steady march back throughout most of 2009. As for bankers, traditionally the nervous turtles of economic woes, they will begin to poke their heads out of their collective shells by the spring of 2009 and the recovery will come into full swing as an improvement in the job market will prove.

How certain can you be of all this? I’ll give it seven chances out of ten. But I’ll happily give you ten chances out of ten that in all recessions what goes down, will eventually come back up!

More SMW Money Matters

Gas Pains: Is Your Budget on Empty?

Five Keys for Building a Successful New Business