Economy analysis: Business Cycle and Economic Trends
Entrepreneurs and their businesses run the financial world. This means they determine the face of development and general human well-being. There is a time when production, trade, and general economic activities are high, and there is a time when they are low. On several occasions, there is what we can call, a balance-out, where it is neither low nor high. And this is the general behavior of business and economy. It is defined by the term “business cycle” or economic cycle or boom-bust cycle.
When defined using a conceptual perspective approach, we can say the business cycle is the upward and upward movement of the GDP. Think of it like any other form of fluctuation, in say internet connectivity or something. It is all about the period of expansions and contractions in the level of economic actions over a long term growth behavior. The subject of the business cycle is one of the most important things to look at when taking economic studies. It does prepare students not only to know how the business world operates but to discover the best ways to adjust when they start running businesses. It gives them the mind to forecast how things will be and prepare adequately.
Different factors influence the growth and success of a business. One of the biggest influencers is a change in demand and supply. As you may have already guessed, when demand surges, businesses grow if they can supply more. And when there is no demand, companies go down because they will not be making enough to meet the production costs and make a profit. Because of this, there comes a time when a business will be booming high, and another period when things will be down low.
Studying economic cycles can help a country adjust their way of dealing with GDP and GNP. When businesses are not doing well, a country stands to lose on the GDP. And the citizens don’t have jobs and cannot spend as desired; there is a problem too because then, someone has to be accountable for the situation.
All these are scenarios that define fluctuations in business. And the process is inevitable; so is its impact on the general economy of a nation. And since we cannot stop it, the best thing is to understand how to handle different situations when and how they happen. This is because human beings depend on such growth, and getting things right can be the difference between growth and failure. We can all agree that business institutions have everything to do with the growth and development of a society. Hence, economic fluctuations not only impact those directly involved in the production, but it goes down to the consumers who depend on those products. When prices surge, you will be compelled to pay more for common products, which may require one to work extra hard.
Phases of the business cycle
The best way to understand the economic cycle is by a clear look into phases that define it. There are four main phases: expansion, peak, contraction, and trough. Around the world, there are bodies that control the outcomes of business fluctuations so that producers and consumers get what they deserve. In the United States of America, for instance, the body that is generally accepted for this job is the National Bureau of Economic Research (NBER). And like the name, suggests they are the final arbiter of the dates of highs and lows in the business cycle.
Expansion is often taken as the first stage of the business cycle. It could be because the business cycle is something that happens over a long time. Hence, expansion is taken as an arbitrary starting point. When it happens, there are all positive things in the GDP. The level, so employment rises, there is decent income, production, and sales all go out. And this means people will pay taxes and debts on time. Financial institutions will grow faster as they will be able to serve more people at all times. In general, the economy has a steady flow of money supply. Also, there is high growth in the investment graph. People enjoy it when the economy is growing well, and they will do everything to ensure they keep things that way. Every process becomes a success, and there is nothing that seems impossible.
But the process cannot continue forever. Think of it like pulling and elastic belt. It will reach a point where its elasticity cannot stretch any further. The same happens with economic growth. When it goes high, it comes a time when the economy cannot grow any further. Hence, the next stage of the business cycle is a peak. Here, the economy hits a snag after reaching the maximum level of growth. Prices hit the highest point while economic indicators stop growing. Here, many business owners start to restructure everything they do. They have to anticipate what might happen next. In most cases, they will take advantage of the situation and sell as much as possible. But production will not be as high, because economic growth starts reversing.
This leads to the next stage of the business cycle - recessions. This is the reverse of the first stage, where business begins to contract. An economy can never be stagnant after reaching the peak. There are very many factors that control economic growth and recession is just a result of these indications. Recession comes with many negative impacts, including a rise in unemployment levels, slow production, sales begin dropping as demand declines, and income becomes stagnant or reduces. It is a time when many businesses will begin laying off some workers and decreasing salaries. Luckily, smart business owners have a way of anticipating such situations, and they will make proper plans for it. A company may, for instance, take advantage of the peak and reap maximum profits to take them through the recession period. However, the worst is yet to come.
Depression comes but not always after depression. But when it happens, economic growth continues further downtrends. Whatever is happening, the recession becomes worse. There is no growth in the economy, whereas the level of unemployment rises significantly. Consumers and businesses face hard times recurring credit, as financial institutions try to weight their options. This is the period when trade goes down with many bankruptcies being reported. Consumers don’t have any confidence as investment opportunities become scarce. And you can imagine what impact such a trend has on the country’s GDP. It is a time of great depression and struggles for sustenance on the socio-economic activities. More negative implications may include a rise in the crime rate as citizens struggle to make ends meet.
The next stage it trough. It is the opposite of a peak, where the economy cannot go further down. In other words, a trough marks the end of the depression, paving the way for the next stage.
A trough marks the start of recovery. And this term is used to literally mean a situation where the economy begins to turn around. Because prices are low, consumer demand more, leading to an increase in production. And this means companies will require more workers, which translates to increased employment. Lenders open up their credit, giving business and consumers more opportunities to grow. This stage marks the end of the business cycle.
How is the business cycle measured?
Business cycles are measured from every stage. For instance, expansion is determined based on the bottom line of the previous business cycles. And this means when one cycle ends, another begins. The next cycle is, therefore, measured from the trough to the peak of the current cycle. Recession is considered based on the peak down to the rough. It is an vise versa kind-of process.
NBER determines when a business cycle begins and ends in the USA. It is responsible for recording this data and sharing for business preparedness. As stated above, a business owner and the government need to be ready for what comes after every stage. The committee measures the real GDP together with other indicators like real income, employment, industrial production, and wholesale-retail growth. These measures and combined with debt and market parameters to determine what causes expansions and how long they are likely to last. NBER recorded that an average expansion lasted for fifty-eight months while contraction went for eleven-month from 1954. After this, NBER has recorded an increase in expansions from the 1990s, rising to 94 months on average, whereas the contraction level remains the same.
Following the 2008 economic recession, a trough was witnesses in June 2009, which the most difficult time for the NBER committee. They looked at the data and discovered ten measures hit the trough between June and December the same year. This means recession when for 18 months starting from December 2007, which was the lowest level since World War II. The USA has also witnessed the longest recessions after the war that came between 1973 to 1975 and 1981 to 1981, both going for more than sixteen months.
How economists view Business cycles
Business cycles have a great impact on a country’s economy. Because of this, economists always have something to say about the situation. For instance, John Keynes states that economic cycles happen because of highs and lows in the aggregate demand. This process brings the economy to short-term equilibriums that differ from full-employment equanimity. He comes up with Keynesian theories that don’t necessarily indicate the periodic business cycles, but they show cyclical responses to socks using multipliers. In this case, the level of investment determines how far the fluctuations will go, which comes from the level of aggregate input.
Other economists, including Finn E. Kydland and Edward C. Prescott from the Chicago School of Economics, come with contradicting ideas challenging the Keynesian Model. In this case, they look at fluctuations in terms of economic growth from technology and innovation point of view, as opposed to monetary shocks.
Some economists feel that the business cycle must happen naturally within the economy, whereas others think it is controlled indirectly by the central banks that intervene in monetary policy. During a fast expansion, the central banks will step in to hold on money supply and raise interest rates, reducing the speed of money supply. And when there is a fast recession, they lower the rates and increase the money supply. These critics hold that economic cycles will cease when these interventions stop.
Investors, markets and the business cycle
This is where investors have to very keen. It comes a time when they can make a huge profit from the market when they choose the right investment at the right time. For instance, an investor can choose commodity and technology stocks during a trough. At this time, the sticks may be cheap, and the economy is entering a recovery period. Hence, they can make a profit by selling them early during expansion. But when the market is overheating and at the peak, and investors can wisely put their bets on utilities, consumer staples, and healthcare. These sectors tend to work better during recessions. It is all about understanding what works best during which periods and tapping into the advantages.
Recessions can have a significant toll on the stock markets. In most cases, the main equity indexes globally endured a decline of more than 18 months during the economic recession of 2008. It was the worst depressions since the 1930s. At this period, global equities were not left behind as they went through major changes at the start of 2001. Companies like Nasdaq Composite were the most hit as indicators dropped by close to 80% from 2001 peak to the 2002 trough. Note also, that recessions resulting from credit bubbles bursting can hit income and consumption far worse than anything else.
The business cycle has become more like natural occurrences today. And different factors cause these fluctuations, apart from possible interventions from central banks. For instance, global pandemics like the 2019/2020 COVID-19 outbreak, which paralyzed major economic processes. Such things can have unexpected results leading to harder times. But the economy always rises stronger after.
Author: James Hamilton