Bottom is insight (don't like this title at all!)

BEAR MOVES IN THE stock market have anticipated nine out of the past five recessions, as an economist once famously quipped. Rebounds in stock prices are no more reliable in anticipating economic recoveries.

The only way to tell if the recent rebound in stocks is truly signaling recovery is to look at supporting data. And those data continue to suggest a bottoming in the economy by the second quarter, which would then turn out to have been duly anticipated by a bottom in the stock market in early March, the first quarter's final month.

This hardly suggests the bull is about to roar. Growth of real gross domestic product in the second half of 2009 is likely to be modest, running at an annual rate of 2% to 3%. The level of real GDP by year end will still be lower than the recent peak. There is always a danger, then, that equity prices will run ahead of this modest outlook. But at least the outlook is beginning to look positive.

Among upside surprises reported last week, one was the widespread rebound in February of durable-goods orders, tracked monthly by the Census Bureau. A durable good, as you might imagine, is technically defined as a tangible item that lasts at least three years. As such, it includes items that consumers buy, like cars and computers (although not plastics like Tupperware), but mainly covers nonconsumer goods like machinery and equipment.

The Census report on durable-goods orders is therefore a useful look into the activities of the manufacturing sector. (Yes, Virginia, there really is a domestic-manufacturing sector, even if much of it is owned by foreign companies.) The February increase in orders followed six consecutive monthly decreases and only partially reversed the decline in January. It tended to confirm the picture of a manufacturing sector that is still contracting, but at a slower rate. If final demand for goods really is beginning to stabilize, then manufacturing activity should be due for a rebound.

THE STRONGER PATTERN OF final demand got further confirmation from data for real consumer spending, released Friday. In the first two months of this year, real personal consumption ran positive, virtually guaranteeing that it will be up in the first quarter relative to the fourth.

Even if consumption flattens in the second quarter, the excessive liquidation of inventories should mean that production will still be due for a pick-up. Despite crushing job losses, it is still possible consumption will trend upward.

Job losses are not the only decisive factor in determining the trend in consumption. Otherwise, we would have to wonder how consumer spending could be higher in the first quarter than it was in the fourth, when the jobless rate was lower. One key factor that should help to buoy consumption is mortgage refinancings, fueled by a mortgage interest rate of 4.85%, the lowest on record.

The low mortgage interest rate helped bring another upside surprise reported last week, the February increase in existing home sales. With strengthening home sales, the negative wealth effect from declining home prices should diminish. One key home price tracked by the Federal Housing Finance Agency actually showed an increase in January.

Already much diminished is the negative wealth effect from the decline in stocks. That, too, should help buoy consumption.