What Is the Economic Cycle?

The economic cycle, also known as the business cycle, is the fluctuation of economic activity between periods of expansion and con🌟traction.

The stages of the c🤪ycle are predictable but their timing ꦐis not. Factors such as gross domestic product (GDP), interest rates, total employment, and consumer spending are analyzed to help determine what stage the economy is currently in and when the next stage might begin.

Understanding the economic cycle helps investors and businesses determine when to make investments and when to pull their money out, as each cycle impacts stock and bond prices as well as corporate earnings and profits.

Stages of the Economic Cycle

An economic cycle is the movement of an economy as it moves from expansion to contraction and back again. Economic expansion is characterized by growth and contraction, including recession, a decline in economic activity that can last several months. Four stages characterize the economic cycle: expansion, peak, contraction, and trough.

Expansion

During expansion, the economy experiences relatively rapid growth, 澳洲幸运5官方开奖结果体彩网:interest rates tend to be low, and production increases. The economic indicators associated with growth, such as employment and wages, corporate profits and output, aggregate demand, and the supply of goods and services, tend to show sustained uptrends through the expansionary stage. The flow of money through the economy remains healthy and the cost of money is cheap. However, the increase in the money supply may spur 澳洲幸运5官方开奖结果体彩网:inflation during the economic growth phase.

Peak

The ✤peak of a cycle is when growth hits its maximum rate. Prices and economic indicators may stabilize for a short period before reversing to the downside. Peak growth typically creates some imbalances in the economy that need to be corrected. As a result, businesses may start to reevaluate their budgets and spending when they believe that the economic cycle has reached its peak.

Contraction

A 澳洲幸运5官方开奖结果体彩网:correction occurs when growth slows, employment falls, and prices stagnate. As demand decreases, businesses may not immediately adjust production levels, leading to oversaturated markets with surplus supply and a downward movement in prices. If the contraction continues, the recessionary environment may spiral into a 澳洲幸运5官方开奖结果体彩网:depression.

Trough

The trough of the cycle is reached when the economy hits a low point, with supply and demand hitting bottom before a recovery. The low point in the cycle represents a painful moment for the economy, with a widespread negative impact from stagnating spending and income. The low point provides an opportunity for individuals and businesses to reconfigure their finances in anticipation of a recovery.

Measuring Economic Cycles

Key metrics determine where the economy is and where it's headed. The 澳洲幸运5官方开奖结果体彩网:National B𒀰ureau of Economic Research (NBER) is the definitive source for marking the official dates for U.S. economic cycles. Relying primarily on changes in GDP, NBER measures the length of economic cycles from trough to trough or peak to peak.

Since the 1950s, a U.S. economic cycle, on average, lasted about five and a half years. However, there is wide variation in the length of cycles, ranging from just 18 months during the peak-to-peak cycle in 1981 to 1982 up to the expansion that began in 2009. According to the NBER, two peaks occurred between 2019 and 2020. The first was in the fourth quarter of 2019, a peak in quarterly economic activity. The monthly peak happened in a different quarter, which was noted as taking place in February 2020.

This wide variation in cycle length dispels the myth that economic cycles are a regular natural activity akin to physical waves or swings of a pendul𒈔um. But there is debate as to what factors contribute to the length of an economic cycle and what causes them to exist in the first place.

Managing Economic Cycles

Governments, financial institutions, and investors manage the course and effects of economic cycles differently. During a recession, a government may use expansionary fiscal policy and rapid 澳洲幸运5官方开奖结果体彩网:deficit spending. It can also try contractionary fiscal policy by taxing and running a 澳洲幸运5官方开奖结果体彩网:budget surplus to reduce aggregate spending to prevent the economy from overheating during expansion.

Central banks may use 澳洲幸运5官方开奖结果体彩网:monetary policy. When the cycle hits a downturn, a central bank can lower interest rates or implement expansionary monetary policy to boost spending and investment. During expansion, it can employ contractionary monetary policy by raising interest rates and slowing the flow of credit into the economy.

During expansion, investors often find opportunities in the technology, capital goods, and energy sectors. When the economy contracts, investors may purchase companies that 澳洲幸运5官方开奖结果体彩网:thrive during recessions, ꦜsuch as utilities, consumer staples, and healthcare.

Businesses that track the relationship between their performance and business cycles can plan strategically to protect themselves from approaching downturns and position themselves to take maximum advantage of economic expansions. For example, if your business follows the rest of the economy, warning signs of an impending recession may suggest you shouldn't expand. You may be better off building up your 澳洲幸运5官方开奖结果体彩网:cash reserves.

Economic Theory

澳洲幸运5官方开奖结果体彩网:Monetarism suggests that a government can achieve economic stability through its 澳洲幸运5官方开奖结果体彩网:money supply's growth rate. It ties the economic cycle to the 澳洲幸运5官方开奖结果体彩网:credit cycle, where changes in interest rates reduce or induce econo🌸mic activity by making borrowing by households, bus𓂃inesses, and the government more or less expensive.

The 澳洲幸运5官方开奖结果体彩网:Keynesian approach argues that changes in aggregate demand, spurred by inherent instability and 澳洲幸运5官方开奖结果体彩网:volatility in investment demand, are responsible for generating cycles. When business sentiment turns gloomy and investment slows, a self-fulfilling loop of economic malaise can result. Less spending means less demand, which induces businesses to lay off workers. According to Keynesians, unemployment means less 澳洲幸运5官方开奖结果体彩网:consumer spending, and the whole economy sours, with no clear solution other than government intervention and an 澳洲幸运5官方开奖结果体彩网:economic stimulus.

The Bottom Line

The economic or business cycle refers to the pattern of expansion and contraction experienced by the economy. The economy remains in an expansion phase until it reaches its peak, reversing to the downside and entering a contraction before a trough, and then begins to expand once again. GDP, interest rates, employment levels, and consumer spending can help define the economic cycle. Although there are different economic theories to explain what 澳洲幸运5官方开奖结果体彩网:drives the economic cycle, the conditions associated with each stage can impact business and investment decisions.