7 reasons to feel good about the economy

By SmartMoney

In a dismal and stagnant job market, rosy economic indicators seem like a rarity -- even if they aren't rare at all.

The sagging labor market weighs on conventional wisdom, overriding data and company news that suggest the economy is perking up. "The public is going to worry about the economy until they see the job market pick up," says John Canally, an economist at LPL Financial, a network of financial advisers.

Economists also worry about the job market. They know that consumer spending is crucial to economic growth, so a worried public could stifle the recovery. The key thing is employment -- is it a leading indicator or a lagging indicator in this situation?" asks Doug Roberts, the chief investment strategist at Channel Capital Research.

Roberts points out that the pickup so far has been driven by government stimulus programs. He says a more sustainable recovery will come when more confident consumers resume shopping.

Many companies have cut deeply to control costs and have turned to their reduced staffs to take on extra responsibilities. When anxious workers are stretched thin -- and profits hinge on people having jobs and buying products -- something's got to give.

"It's kind of like the paradox of thrift: It's good if one company (runs tight) but if every company does that, there's no demand for anyone else's product," says Robert Johnson, the associate director of economic analysis at Morningstar.

Still, many companies are posting results that trend upward, and there are lots of other signs that a recovery is under way -- even if it hasn't yet reached the job market. Most working economists agree that the momentum has shifted; the question is how fast, and by how much, the economy will bounce back.

"It's hard for me to find an indicator that isn't up," says Johnson, who expects a strong recovery. "My personal disposition is, it's going to be a lot better than most people think," he says.

Here are seven positive signs that economic growth is on the horizon:

1. Bernanke says it is

Take it from the Federal Reserve: Growth is on the way. "The prospects for a return to growth in the near term appear good," Fed Chairman Ben Bernanke said in a speech earlier this month at the Brookings Institution. "From a technical perspective, the recession is very likely over at this point."

Bernanke did not predict a strong or swift recovery. "The economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels," the Fed chief said. "It's still going to feel like a very weak economy for some time."

2. Inflation is in check

Last week, the Bureau of Labor Statistics said the Consumer Price Index rose just 0.4% in August -- and it has slipped 1.5% over the past year. The August increase was driven by a bump in the gasoline index, which rose 9.1% from July to August but has fallen 30% over the past 12 months. The food index was essentially unchanged in August. New-vehicle prices were down 1.3% last month, and prices for used cars and trucks rose 1.9%.

The lack of inflation is good news for workers confronting a tight job market with few prospects for wage increases. It also gives the Fed the leeway to keep interest rates low to encourage lending.

3. Deal-making is ramping up

The pace of merger-and-acquisition activity has accelerated in recent weeks, with several billion-dollar deals being made or proposed, including Kraft Foods' (KFT, news, msgs) bid for Cadbury (CBY, news, msgs), Walt Disney's (DIS, news, msgs) bid for Marvel Entertainment (MVL, news, msgs), Warner Chilcott's (WCRX, news, msgs) purchase of Procter & Gamble's (PG, news, msgs) prescription drug unit and Dell's (DELL, news, msgs) decision to pick up Perot Systems (PER, news, msgs) for about $3.9 billion.

This activity could signal that big companies that have emerged from the recession relatively healthy are looking to snap up weakened rivals, or that some companies are looking to position themselves for stronger growth as the economy perks up.

4. GM is making more cars

Vice Chairman Robert Lutz said last week that General Motors may need to increase production of four of its most popular new models to keep up with demand. And making those extra cars might require hiring more workers at some factories. Bankrupt in June, hiring in September -- sounds like good news.

Video: The hot dog economic indicator

For now, the auto industry has gotten an artificial boost from the wildly popular Cash for Clunkers program. Of course, that incentive may have simply shifted some vehicle sales from the fourth quarter to the third, as consumers rushed to take advantage of the subsidy. Still, demand for cars will pick up eventually, Johnson says. "Cars wear out, they break down. It isn't like you can totally put those off forever."

5. Industrial production is up

Industrial output rose 0.8% in August, the Federal Reserve reported. Manufacturing production expanded by 0.6%; excluding motor vehicles and parts, the index rose 0.4%.

"Over the first half of the year all companies cut inventories at the fastest pace ever," Canally says. Now, they are realizing they may have cut too deeply and are being forced to pick up production. Once that kind of pickup starts, it's unlikely to reverse, he says.

6. Regional reports of growth

The Philadelphia Fed's September Business Outlook Survey found the region's manufacturing sector was exhibiting signs of growth. The survey's index of current activity jumped from 4.2 in August to 14.1 in September, the highest reading since June 2007. Although employment and work-hour indexes remained negative, indicators of future activity approached 2004 levels, the report said.

The Institute for Supply Management's purchasing managers' index ticked up from 43.4 in July to 50.0 in August, ending 10 straight months of contraction. Production and new orders were both in positive territory for the first time in a year.

7. A brighter outlook for consumers

Retail sales rose a surprising 2.7% last month, the Commerce Department reported. Cash for Clunkers spurred some of the increase, as sales of motor vehicles and parts rose 10.6%. But other sectors also saw gains.

Household net worth increased during the second quarter, the first gain since the third quarter of 2007, according to the Fed's flow of funds report. The central bank said household debt contracted for the second consecutive quarter.

"Consumers have already started to repair their balance sheets," Canally says."It's not like it has to start now."

And not every consumer is drowning in debt, Johnson says. "We all know somebody like that, but it doesn't mean every one of us is like that."

The healthier consumers who see bargains and start shopping will pick up where the government stimulus leaves off, sparking sustainable growth, Johnson predicts.

This article was reported by Sarah Morgan for SmartMoney.