FACTBOX: Checking the U.S. economy's vital signs

WASHINGTON (Reuters) - Data over the next couple of months should provide a clearer signal on whether the U.S. economy is indeed beginning to recover or merely pausing before another downturn.

Most economists think the recession will end in the third quarter, although there is considerable debate over the strength of recovery and the risk of a recession relapse.

Here are some of the vital signs that economists and investors are watching as they track the economy's path:

HOUSING:

* Inventories of unsold homes provide the best forward-looking measure. The latest figures from the National Association of Realtors shows the supply of unsold existing homes was 3.8 million at the end of May. At the May sales pace, it would take 9.6 months to clear that supply.

In 1999, before the housing boom, there was typically a five or six months' supply of unsold homes. Economists say it may take years to get back to that sort of level, but they would like to see the overhang continue to shrink.

Supply has come down by 1.3 months from a year ago and a move below nine months would be an encouraging sign.

JOBS:

* Unemployment tends to keep rising long after recessions end, so even the more optimistic economists think job losses will continue to pile up through the end of the year.

Watch for signs that June's surprisingly weak report, which showed employers cut a net 467,000 positions, was an aberration. Before that report, the pace of job cuts had declined every month since January, when a net 741,000 jobs were lost. Look for that pattern to resume.

* Another key figure from the monthly jobs report is hours worked, which declined in June. Harvard University economist Jeffrey Frankel, who sits on the National Bureau of Economic Research panel that dates the start and end of recessions, has said that is one factor he is watching. It needs to move up to signal a turn in the business cycle.

* Weekly readings on claims for jobless benefits are also worth monitoring. The big number to look for is continued claims, which measures those who remain on the benefit rolls after collecting an initial week of aid.

Goldman Sachs economist Jan Hatzius says a rise of 30,000 per week in continuing claims is consistent with positive GDP growth in the neighborhood of an annualized 1 percent.

These are volatile numbers -- particularly after the bankruptcy of auto makers Chrysler and General Motors threw thousands more people out of work. Still, for the week ended June 20, the most recent data available, the total went down by more than 50,000. If it stays in that area, third quarter GDP may well be in the plus column for the first time since the second quarter of 2008.

SPENDING:

* Consumer spending may get worse before it gets better. Figures for April and May got a boost from government economic stimulus programs, and analysts are looking for a reversal in June. As a result, July and August loom especially large.

Look to the retailers themselves for guidance because those are key months for back-to-school shopping, which is the second biggest shopping period of the year, behind only Christmas.

Autos may give a boost to sales thanks to recent "cash for clunkers" legislation that gives incentives for people to buy newer, more fuel efficient cars. That means it will be important to watch the "excluding autos" column in the Commerce Department's monthly retail sales data to gauge whether discretionary spending is starting to pick up.

* Business spending improved a bit in May. A good number to watch is in the Commerce Department's durable goods report.

The classic barometer of business spending is no defense capital goods, excluding aircraft, but economists are also monitoring computers, equipment and software for clues that companies are through with draconian cost-cutting measures.

MANUFACTURING

* The Institute for Supply Management's monthly manufacturing index provides the best real-time look at the state of factory activity. While 50 is the dividing line between expansion and contraction in business activity, anything above 41.2 over a period of time indicates that GDP is positive. The latest reading was 44.8 in June. If it at least holds that level, it would support positive third-quarter GDP.

* Inventories have been shrinking, which was a big part of the reason behind the steep first-quarter decline in GDP -- and a major factor in economists' prediction that economic growth will resume in the third quarter.

The inventory-to-sales ratio, which measures how long it would take to clear out inventory at the current sales pace, was stuck right around 1.43 in March and April, well above the prior year's 1.27. Still, the economic bulls argue that inventories are leaner than they appear because the current sales pace is abnormally slow.

CORPORATE PROFITS:

* The second-quarter earnings season kicks into high gear the week of July 15. The numbers themselves are likely to be ugly. For the Standard & Poor's 500, the consensus forecast is for an earnings per share decline of about 36 percent from a year earlier, according to Thomson Reuters data.

More important for the pace of recovery is what the companies say about the second half. Right now, analysts are looking for a little improvement in the third quarter, then a massive 183 percent jump in fourth-quarter profits. Granted, that's compared with a disastrous fourth quarter of 2008, but watch out for companies tamping down those expectations.

BOND MARKET SIGNALS:

* Moody's Investors Service's chief economist John Lonski has found a link between junk bond default rates and recessions, with defaults peaking about two months after a recession ends. Moody's expects junk bond default rates to peak around November, which would indicate an August or September end to the recession.

Junk bond spreads, the extra yields they pay over Treasuries, are also falling, which improves access to funding and often precedes a loosening of lending standards by banks. If spreads narrow another 150 basis points to about 800 basis points over Treasuries, much looser bank lending could follow, helping fund the early stages of the recovery, Lonski said.

(Reporting by Emily Kaiser; additional reporting by Dena Aubin; Editing by Leslie Adler)