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How To Tell When The Recession Is Really Over

How To Tell When The Recession Is Really OverThere are two kinds of recessions: the one that economists measure, and the one that ordinary people feel.

The official recession is over. That’s because the economy is growing again after a sharp decline, with GDP back to the levels of mid-2008. For people who have kept their jobs, suffered no loss of income, and enjoyed a rebound in their investments thanks to the year-long stock market rally, things are pretty good.

Then there’s the unofficial recession, which persists. More than 8 million people have lost their jobs over the past two years. Aside from that, the economy has barely started to add those back. Many others have had their pay or hours cut. The housing bust, in its fourth year, still isn’t over.

Foreclosures continue to mount, businesses and consumers remain gloomy, and many families are struggling to get by on a reduced income. “It’s a recovery, but it sure doesn’t feel like it,” says Nariman Behravesh, chief economist for forecasting firm IHS Global Insight. Here are five things that still must happen for a robust recovery to kick in.

Banks need to lend more. The government’s emergency measures helped stabilize the financial system, but banks haven’t taken the next step and increased lending. With trillions in bad loans still on their books, many banks continue to hoard cash and turn down loan applications. That depresses the market for homes, cars, appliances, and other costly items that many consumers can’t pay for in cash. It also squeezes small businesses, which often rely on credit to meet payroll, order supplies, invest, and grow.

Behravesh predicts that lending could bottom out and start to pick up by late this year or early next year. Although that would probably be the point at which the Federal Reserve starts to raise interest rates to subdue inflation.

How to know if there are improvements in the market

There are a few things that will signal improvements in the credit market. It may be a drop in the required down payment for well-qualified home buyers, which is typically 30 percent or more now, increase the availability of car loans for subprime borrowers with a credit score below 680, and banks’ willingness to improve their customers’ credit-card limits, if asked.

Incomes need to rise.

Median income was stagnant for about a decade leading up to the recession, and it probably fell 5 percent or more over the past couple of years. Some economists worry that reduced incomes could indefinitely curtail consumer spending, which has long fueled the U.S. economy. A glut of unemployed workers will keep wages low in many industries for years. And since many families have lost wealth because of falling home values or declining investment portfolios, or both, they need to save more to prepare for retirement. That leaves less money to buy stuff. The good news is that inflation is low, and energy prices are stable, which helps stretch a dollar.

Housing needs to stabilize.

Most of the pain is probably in the past, but home values continue to erode in many regions. Moody’s predicts that house prices, which have fallen more than 30 percent from their 2006 peaks, could still fall another 5 to 10 percent through the end of this year. Since many families still have the majority of their wealth invested in their homes, the economy can’t get healthy again as long as such a huge asset is falling in value.

The end of the federal home-buyer tax credit and other government programs throughout the year will test whether the housing market can stand on its own. If it can’t, the government could step back in, but that would only signal further weakness in a sector that accounts for more than 15 percent of the economy. The silver lining is that falling prices make it a great time to buy, for those with enough cash or the ability to get a mortgage.

Confidence needs to rebound.

Americans remain gloomy, with most consumer-confidence surveys showing only modest improvements from the low points hit during the recession. The most obvious reasons are the weak job market and a sense that the recovery will be ineffective at best.

Businesses are downbeat too, with CEOs worried that strapped consumers will put their wallets away. That makes them reluctant to hire, which perpetuates the malaise. Confidence is a perplexing psychological phenomenon, and economists aren’t sure what it will take to make consumers upbeat enough to propel a robust recovery. But once home prices stop falling, jobs seem more secure, and people feel like the bloodletting is over, that will undoubtedly help.

Jobs need to return.

The availability–or lack–of jobs is the single biggest factor in the economy. Unfortunately, a pickup in hiring is likely to be painfully slow. Many of the 8 million lost jobs are probably gone forever, as manufacturers downsize their operations, and many companies substitute technology or cheaper foreign labor for American workers. The unemployment rate, which is 9.7 percent now, might even rise throughout the year, as workers who gave up looking for jobs try again, and the labor force swells.

Still, economists recognize some familiar patterns in the job market that suggest things are finally getting better instead of worse. Corporate profits are reliable, thanks to aggressive cost-cutting over the past two years. That means companies can afford to hire workers if they decide to. And productivity gains have hit record levels recently. Companies are extremely efficient. If demand picks up, they may only be able to meet it through increased staffing.

A good indicator of real improvement would be several consecutive months of six-figure job gains. This is due to permanent hiring and not temporary factors like the census or weather-related events. “The recent resumption of employment growth will be sustained and gather strength over time,” insists T. Rowe Price chief economist Alan Levenson. That’s not the kind of roaring endorsement most Americans want to hear. But it suggests that sooner or later, the recovery in your neighborhood will catch up with the one that economists see in the data.

By Rick Newman

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