“The economic cycle is the fluctuation of the economy between periods of expansion (growth) and contraction (recession).”
The Economic Cycle experiences four stages, Expansion, Peak, Contraction, & Trough.
In order to determine what stage of the Economic Cycle we are in, we use units of measurement such as Real Gross Domestic Product & Total Unemployment Rate. We can also review markets and see to what extent they’re experiencing inflation, such as the Housing Market.
I wrote this article to help readers such as yourself stay informed on how to best act within your country’s economy at any given time. Being able to discern what stage of the Economic Cycle you are in gives you the ability to better understand your economy and how it operates.
An Expansion Stage, also known as Economic Recovery, due to the fact the stage happens after Trough, a stage where the economy is at its lowest economic output. Stages can last months or years and is dependent on banks, free market and the government.
Decreasing Interest Rates
Banks help inflate and deflate The Economy through the use of increasing and decreasing interest rates. When interest rates are low, consumers become borrowers, Banks hand out debt while consumers in return offer credit, consumers are stating they would be willing to borrow x sum of money and pay it back within a certain time frame along with a fee, the fee being the interest rate. When consumers have excess cash and begin to spend it, GDP Per Capita begins to rise. Due to the surplus of cash in an economy, funds are allocated to businesses and services. Banks incentivize consumers to spend more than what they have and this causes inflation which leads to expansion.
Increase in Demand
With more cash in circulation as the number of borrowers increases, demand come into play. When businesses realize an increase in demand they begin to increase prices and hire new employees in order to attempt to match the demand, other businesses begin to do the same in order to compete. Thus decreasing Total Unemployment Rate.
Along with Banks & Free Market, you have Government. Inflating an Economy by introducing more jobs into the public sector. Printing currency, buying treasury bonds, and overall bringing more cash into circulation. Government also offer subsidies to markets in need, as well as decrease taxes to help increase consumer spending. Governments have fiscal policies in place to help stimulate an economy and vise versa. During the trough stage the Government may enact the Expansionary policy, which consists of several methods to help bring the economy into its expansion stage.
“When an economy is producing at maximum output and employment is at or above full employment, an economy is said to be at its peak.”
Maximum Economic Output
An Economy is in its peak stage when interest rates & total unemployment are near zero, & GDP & GDP per capita are on a significant rise. What happens when you give both consumers and businesses access to an excess amount of capital? Consumer spending increases rapidly, prices are high to account for the demand in the economy, and businesses begin hiring more employees to help take on the new work load. At some point, a threshold is hit and productivity can no longer be sustained. Businesses are letting work go undone, simply due to the fact that they already have enough work to deal with, jobs don’t get finished, and services are delayed, this is when an economy reaches its tipping point.
“A recession, known as the contraction stage, begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.“
Paying Back Debt
Interest rates carry a high influential factor to help induce a contraction stage. When banks start raising interest rates, consumers realize they need to cut back on spending in order to repay their debts, once consumer spending is decreased, the economy can begin stabilizing after experiencing maximum output. With consumer spending on a decline, businesses that previously required new employees to help take on new work, begin letting go of workers because there is less work coming in, demand is lowering so prices are lowering and thus businesses are not making as much as they were. The excess cash that has existed in the market is now making its exit, back to its origin, the bank.
The NBER identifies a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, and industrial production.”
Besides consumers needing to pay back debts, an economy can be forced into a recession. Let’s take a look at the recession the United States experienced back in 1973–1975.
The recession of 1973–1975 in the U.S. came about because of rocketing gas prices caused by OPEC’s raising oil prices as well as embargoing oil exports to the U.S. Other major factors included heavy government spending on the Vietnam War, and a Wall Street stock crash in 1973–74.
Sometimes consumers are pushed back against a wall and forced to cut back on spending in order to account for unprecedented events. When the stock market crashed in 73–74, not only were investors losing money, but average consumers were having to pay about 35% more for an everyday use commodity like gasoline, on top of that the government wasn’t introducing new jobs into the public sector or offering subsidies to markets in need because they were too busy fighting a war, which resulted in an increase in total unemployment and decrease in GDP & GDP per capita.
Eventually consumer spending after being on a constant decline reaches an all time low. Both businesses and consumers have little to no excess capital. Businesses have let go all or most of the employees that were hired during the expansion stage and total unemployment is at its highest. With consumer spending at an all time low, demand reflects just that and businesses struggle to keep a stable flow of income, experienced businesses rely on their built pipeline of clientele to help keep them afloat while the majority of new businesses struggle and fail. Just like a cycle, the next event the economy would need to experience is expansion, induced by interest rates, expansionary policy, and demand.
The Economic Cycle is a part of everyday life, while we go about our way, living our lives the economy is constantly experiencing changes through GDP, Total Unemployment, GDP Per Capita and more. The next time you hear about the housing market inflating, or retail stores annual sales increasing by x percentage along with several other markets, hearing stories from your friend about how they got a loan with the lowest interest rates, you should be able to put two and two together and realize you may be experiencing an expansion stage. Same goes for other stages like contraction when you notice people out of a job, sharp declines in markets, high interest rates being offered by banks or when you see an event on the news of scale that could impact the economy negatively, there are multiple indicators of where the economy is headed, units of measurements, credible news and word of mouth are your best resources.