Economic Cycles Explained

The term economic cycle is something we all should know and understand because it affects all of our lives. Actually, it affects the lives of everyone who came before us and everyone who will come after us as well. Economic cycle refers to the natural and inevitable fluctuation of the economy between periods of expansion (booms) and contraction (recessions). Factors such as gross domestic product (GDP), interest rates, levels of employment, and consumer spending are all pieces of the puzzle when trying to determine the current stage of the economic cycle.

Another key point to recognize when trying identify the current state of an economic cycle is paying attention to what investors are investing in. During a period of expansion, an economy will have a GDP that is increasing rapidly. Thus, investors will try to purchase companies in technology, capital goods, and basic energy during these times. During a period of contraction, investors will look to purchase companies in the utilities, financials, and healthcare fields. Essentially, they want to capitalize on whatever people are interested in during that time. When times are good and the economy is doing well, people have excess money for new technology, capital goods, etc. When times are bad, people’s focus is more on basic necessities of life such as healthcare and keeping the lights on in their house.

Key aspects of an economic boom include higher than average GDP growth, higher disposable incomes, less unemployment, increased consumer spending, and better wages. As you would expect, key aspects of a recession include below-average GDP growth, lower disposable incomes, higher unemployment rates, and decreased consumer spending.

Economic cycles are more than just fluctuations in the economy. The economy fluctuates every day with not much notice, but a cycle change has far reaching effects that nearly everyone in every sector will feel. Historically, a recession is defined as when the economy has two consecutive quarters of negative growth. Most recessions have a lifespan of 18-24 months.

Recessions are never good, but they are natural and will happen. When they do, keep in mind that it’s only a matter of time before things start picking up again. How long the recession will last is tough to predict so it’s always smart to be prepared. Start saving. Talk to a financial advisor. Make sure your finances are in order so that when times do get tough, you’re ready.

photo credit: kenteegardin via photopin cc

Leave a Reply