Ten Ways You’ll Know The Recession Is Over

1. GDP Improves

U.S. GDP starts to rise at 2.5% annual rate. The International Monetary Fund recently revised its forecast for U.S. GDP growth to 2.3%, down from its previous forecast of 2.5% in April. In addition, the agency projects that the gridlock in Washington, which could cause an increase in 2012 tax rates and automatic budget cuts, would cause GDP growth to fall below 1% next year.

In its World Economic Outlook Update, the IMF economists write: “In the extreme, if policymakers fail to reach consensus on extending some temporary tax cuts and reversing deep automatic spending cuts, the U.S. structural fiscal deficit could decline by more than 4 percentage points of GDP in 2013. U.S. growth would then stall next year, with significant spillovers to the rest of the world.” Other agencies, including the well-regarded OECD, have made similar comments.

Until most forecasts predict a solid growth of U.S. GDP at 2.5% or higher per annum, the economy will not hit an escape velocity that would enable it to increase employment, nor give a foundation to business and consumer spending, which in turn will increase tax receipts and erode the deficit.

2. Job Creation

Job creation hits 250,000 per month. Bureau of Labor Statistics data show that the U.S. economy added only 80,000 jobs in June, which was about on par with April and May. The news was a letdown. Jobs added had been above 200,000 a month in December 2011 and January and February of 2012. That spurred hopes that a recovery from the Great Recession had finally begun in earnest.

If job additions do not reach above 250,000 a month for an extended period, it will indicate that employers are not sanguine enough about the economy to risk new expenses. In addition, it will show that whatever modest stimulus the federal government may put in place after the election has been ineffective. With the erosion in the work force of the public sector due to austerity measures, additions in the private sector will need to be closer to 300,000 a month. Job creation figures are as important as any other set of information to signal a recovery.

3. Housing Market Stabilizes

National housing prices and foreclosures stabilize. There have been some positive signs about the future of the housing market recently. The Commerce Department announced that new home construction starts rose 6.9% in June to an annual pace of 760,000 — better than any month since October 2008. The news was undermined a little by figures that showed permits dropped 3.7% to an annual rate of 755,000.

Although different housing measures have been described as mixed recently, they have actually been mostly negative. The carefully followed Case-Shiller Index showed that April prices were off in most of the top 20 markets year-over-year, with the average drop at 1.9%. On the basis of the same measurement, several cities had declines of 3% or more. Foreclosures remain high and may move higher. RealtyTrac reported that foreclosures rose for the first time since 2009 year-over-year during the second quarter of 2012. Just recently, The National Association of Realtors reported that sales of previously occupied homes fell 5.4% in June to a seasonally adjusted annual rate of 4.37 million homes. The number was the worst it had been since October.

The start of a housing recovery likely will signal several positive changes. One is that unemployment has started to fall and the pool of buyers has risen. Another is that the number of underwater mortgages has begun to drop, which means more people will have home equity for essential needs such as retirement. The housing market has caused such damage to the economy that an overall rebound in home prices should improve the national mood.

4. EU Recession

Recession ends in Italy, France and the United Kingdom. The European Union is the world’s largest economy by GDP. At $17.5 trillion, it is about $2.5 trillion larger than the U.S. The region is an essential export market for U.S. goods and services. A number of American multinationals have already posted second-quarter earnings that were hurt by EU sales. General Motors (NYSE: GM) and Ford (NYSE: F) have announced that they expect losses in the hundreds of millions of dollars to be posted for the second quarter, partly due to weakness in the region. IBM (NYSE: IBM) recently announced a drop in sales in the region.

Some of the nations in the union have at least held their own. Germany’s unemployment rate has been stable around 5.6%. Recent figures from the U.K. put its unemployment rate at 8.1% — similar to the U.S. But in Spain and Greece, the unemployment rates are well above 20%. In Portugal and Ireland, the number is about 15%. The weakest economies in the EU will not recover for years. But the large economies by GDP — Germany, France, the U.K. and Italy — will need sustained economic growth to drive demand of U.S. products and services. That will give a lift to revenue of American exporters, which in turn should create jobs.

5. China GDP Improves

China’s GDP growth moves above 9%. China remains the factory for a huge portion of the world’s goods. It is also a major consumer of commodities. A slowdown in the Chinese economy is a signal that demand for both business and consumer products in the EU, U.S. and Japan is faltering. Chinese GDP growth rate was 10.4% in 2010, much closer to its traditional growth. The number dropped to just above 9% in 2011. But in the second quarter it dropped to a very modest 7.6%, signalling China is in trouble. That was the slowest growth since the first quarter of 2009 — at the end of the Great Recession.

One way China contributes to global economic growth is with its rising middle class, which has become a relatively new set of consumers of imports from the U.S. Any decline in that appetite hits many American exporters. Another way China contributes to economic expansion is through its production activity. China remains the single best barometer of manufactured goods in the world. But China’s Purchasing Managers Index, a measure of factory activity, is unchanged or even contracting in recent months. When the People’s Republic government reports that PMI has moved sharply higher, and that translates into GDP growth of 10% or better, it will be another sign that an impressive global recovery is underway.