With the Dow Industrial index crossing the 9100 mark (the highest level since early November), should we take that as a sign that the recession is over? Is the economy healthy? Will your portfolio increase in value? And will it be easier to find a summer job?

Even though there is more optimism in the air, it isn’t clear that the recession is over. Just like you use “indicators” to judge how healthy you are, investors and economists rely on a range of indicators to gauge the health of the U.S. economy. When evaluating our personal health, we look at things like quality of sleep, eating habits, and do we have any aches or pains? For the economy, we look at indicators such as the unemployment rate (how many people are out of work versus earning an income), housing prices (what is the value of my home), or the consumer price index or CPI (does a basket of goods cost more or less today versus yesterday?).

One key indicator being looked at right now is corporate earnings – how much money public companies are earning today versus prior periods. Investors look for three things: 1) How much money did the company earn, 2) Is it more or less than expected, and 3) What is the quality of earnings (does it imply there will be higher earnings in the future?). Part of the reason the markets have gone up in value is that companies are not just reporting earnings, but they are beating expectations. For example, Ford lost $638 million or $.21 a share last quarter which beat analysts’ expectations of a loss of $.53 a share.

The first two are pretty straightforward, but it is the “quality of earnings” question that makes you ask yourself if the economy is really starting to grow. As of last week approximately 70% of the firms reporting earnings beat expectations. Unfortunately, not all earnings are the same. For example, imagine there are two companies, we’ll call them “Company A” and “Company B.” Last quarter, both had $100 in revenue, $80 in expense, and therefore $20 in pretax earnings. This quarter Company A created $30 in earnings by growing revenues to $120 and expenses to $90. In comparison, Company B created $30 in earnings by simply shrinking expenses to $70 and keeping revenue the same. Which company is better positioned for future growth? Company A, which is expanding its share and investing in the future or Company B, which is simply cutting costs?

What does this mean? Well, if you’re of the view that earnings only grew and were higher than expected because of cost cutting, you may not believe the economy is poised for growth. On the other hand, you may be a bit more optimistic and think cost cutting actually sets the stage for blow-out earnings once the economy picks up.

So, is the recession really over? It depends who you ask!

Just like you can come to a different conclusion than your friend when judging what a slight cough means to your overall health, economic indicators are the same. At the end of the day, while the indicators may be the constant, it is important to realize that everyone interprets them differently.

- Amy