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Recession will end this summer

Good news, everyone: The recession will end this summer.

The economic forecasting gauge with the best track record was positive in the past two weeks for the first time in nearly two years.

The Weekly Leading Index from the Economic Cycle Research Institute was up 2.1 percent when it came out June 25 and then up 4 percent Thursday.

"We'll definitely see the end of this recession this summer," ECRI managing director Lakshman Achuthan said Wednesday. "As unique and unprecedented as this recession has been, the transition to recovery is showing up in a textbook way in the leading indicator charts."

Achuthan said the recovery is also showing up in the longer, shorter and coincident indexes maintained by ECRI - plenty of evidence that it has a life of its own.

"When you have a pervasive move in the leading index as we have now, it suggests a more virtuous cycle that feeds on itself has begun," he said.

Achuthan acknowledged that difficulties such as unemployment and excess debt will take a long time to overcome, and that confidence is weak. That's to be expected.

"The general mood is probably overly pessimistic. That's quite normal in the wake of a crisis. There is almost always a giant error of pessimism," he said.

Since we understand now how an excess of optimism led to the borrowing and buying boom that caused the recession, our efforts to avoid making such a mistake again push us in the opposite direction, he said.

What's unclear and perhaps yet to be determined is the strength of the recovery, he said.

Achuthan said that since only a small portion of the $780 billion federal stimulus approved in the spring has been spent, as more of it reaches the economy it could reinforce the upturn showing in the leading indexes.

"Another kind of game changer relates to home prices, where if we have a stabilization in home prices - and there's evidence that is happening - then the toxic assets that have been at the heart of the crisis start to get neutralized," he said. "The reason that's important is if home prices stop falling, these essentially 'zombie' banks start to come back to life."

Banks are sitting on a lot of monetary stimulus from the Federal Reserve, he said, and when they get back to normal, they'll start passing that liquidity through to businesses and the economy.

While those events would signal a stronger recovery, it's also possible the economy could experience a second dip, as it did in 2002, but not go back into recession, he said. The worst case would be like the early 1980s, where after a year of recovery another recession hit.

But Achuthan thinks those outcomes are unlikely and is confident that the Weekly Leading Index would will give warning ahead of time. "If it begins to turn back down, that's a big warning sign of worse to come," he said.

For that reason, he's somewhat bullish about the markets.

Even though stocks have risen about 40 percent since March and many commodities are up more than 100 percent, there is still room for improvement in market sentiment, he said.

"I think there is a significant group, maybe a majority, that believes one way or another that the market rally is a bear trap and not a real upturn," Achuthan said.

"The indicators don't forecast the markets directly - we don't make calls - but they can tell us that the likelihood of a cyclical downturn in the market from here is low," he said. "So that can be taken as marginally or outright bullish. ... We're not saying it can't go down 5 (percent) or 10 percent."

Exactly when the recession ends this summer won't be known until a year from now, he said.

That will happen when the data revisions are done and the National Bureau of Economic Research sets the date. In the last recession, the NBER decided in July 2003 that the recession had ended in November 2001.

"Let's not hold our breath for that," Achuthan said. "We'll all get a sense in retrospect that the recession ended this summer."