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New Index Points to Economic Recovery

The recession likely will end in September and be followed by a mild recovery, according to the new USA TODAY/IHS Global Insight economic outlook index.

But despite Federal Reserve Chairman Ben Bernanke's recent talk of the economy's "green shoots," few are confident prosperity is near. And the Fed's "beige book" report released Wednesday, a look at the nation's regional economies, says that the economy remained generally weak in April and May.

"We're two to three months away from an upturn," says Nariman Behravesh, chief economist for IHS Global Insight.

David Wyss, chief economist for Standard and Poor's, agrees: "We see a bottom in the fall, but there's a lot of risk attached to that."

The economic outlook index used to predict the recession's end is a composite of 11 forward-looking economic and financial indicators that predicts future GDP growth, adjusted for inflation. For each indicator, it uses an average of the latest three months relative to an average over the past year.

Seven of the index indicators were positive in the May report. Three positive signs:

-- The interest rate yield curve is steepening. Yields on Treasury securities typically rise from the shorter-term Treasuries to longer-term ones. When the percentage-point difference between long-term and short-term Treasury securities yields increases, it's a sign that demand for credit is growing - or that the Federal Reserve is keeping short-term rates low. Either way, a steepening yield curve often portends future economic growth.

-- Big-ticket item orders are up. In April, orders for non-defense capital goods - durable items used to make roads, buildings or machinery - were up slightly. Orders are still far below year-ago levels, but they are no longer falling dramatically.

-- We're officially in a bull market. Because investors try to forecast corporate earnings 12 to 18 months in advance, stock prices have a very good record of predicting future economic activity. The stock market rose strongly in April and May.

One worry: another financial crisis triggered by the collapse of a major financial institution. Wyss says he's less worried about U.S. banks than he is about European ones, which have been struggling with loan losses in Eastern Europe.

Because of lingering credit woes for companies, Behravesh thinks the new economic recovery will be sluggish.

"Consumers continue to be cautious," he says. "We're not out of the woods yet."

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