The Business Cycle
What goes through periods of growth and decline, peaks and valleys, and steady states? These phrases could just as easily be used to describe a roller coaster ride, but they're more commonly applied to the business cycle.
Changes in economic activity measured over a period of months or even years are referred to as the business cycle. Monitoring the cycle allows experts to make educated guesses about the economy's future. When certain conditions are met, such as increases in GDP, wages, and employment, the National Bureau of Economic Research issues official statements about the state of the economy.
Recovery & Recession
An upswing, or recovery, occurs when the economic indicators improve over time. A recession occurs when the same indicators go through a contraction. A particularly long or severe recession is referred to as a depression.
Despite being called a cycle, it’s important to understand that the business cycle is not regular or even cyclical. Its pattern resembles the movement of waves, and those waves don’t consistently undulate at set, periodic intervals. Some recoveries have lasted several years, while others are measured in months. Recessions, too, can last for a number of years or be as short as a few months.
Stages of Cycle
The question then becomes, how should investors evaluate data about the business cycle?
Investors who take into account the fact that the economy goes through cycles of expansion and contraction may have a more complete picture of the cycle. Investing choices during the recovery phase may be affected by knowing whether the economy is in the early or late stages of the cycle. On the flip side, it may be important to know whether the economy is in a shallow or deep cycle during a downturn.
Over the course of a few months, the economy will go through the phases of recovery, recession, and recovery. Recognizing that economic conditions tend to fluctuate in waves can help you assess the current state of your company more objectively.