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Also, since about the start of the great moderation, the average longevity of expansions appears to have roughly doubled. The pre-WWII experience of most market-oriented economies included deep recessions and strong recoveries. However, the post-WWII recoveries from the devastation wreaked on many major economies by the war resulted in strong trend growth spanning decades. When trend growth is strong—as China has demonstrated in recent decades—it is difficult for cyclical downswings to take economic growth below zero, into recession.

For the same reason, Germany and Italy did not see their first post-WII recession until the mids, and thus experienced two-decade expansions. From the s to the s, France experienced a year expansion, the U. Canada saw a year expansion from the late s to the early s.

Even the U. With business cycle recessions having apparently become less frequent, economists focused on growth cycles, which consist of alternating periods of above-trend and below-trend growth. But monitoring growth cycles requires a determination of the current trend, which is problematic for real-time economic cycle forecasting.

As a result, Geoffrey H. Moore, at the ECRI, went on to a different cyclical concept—the growth rate cycle. Growth rate cycles—also called acceleration-deceleration cycles—are comprised of alternating periods of cyclical upswings and downswings in the growth rate of an economy, as measured by the growth rates of the same key coincident economic indicators used to determine business cycle peak and trough dates.

But importantly, GRC analysis does not require trend estimation. Using an approach analogous to that used to determine business cycle chronologies, the ECRI also determines GRC chronologies for 22 economies, including the U. Because GRCs are based on the inflection points in economic cycles, they are especially useful for investors, who are sensitive to the linkages between equity markets and economic cycles. The researchers who pioneered classical business cycle analysis and growth cycle analysis turned to the growth rate cycle GRC , which is comprised of alternating periods of cyclical upswings and downswings in economic growth, as measured by the growth rates of the same key coincident economic indicators used to determine business cycle peak and trough dates.

In the post-WWII period, the biggest stock price downturns usually—but not always—occurred around business cycle downturns i. However, each of those major stock price declines occurred during GRC downturns. Indeed, while stock prices generally see major downturns around business cycle recessions and upturns around business cycle recoveries, a better one-to-one relationship existed between stock price downturns and GRC downturns—and between stock price upturns and GRC upturns—in the post-WWII period, in the decades leading up to the Great Recession.

In essence, the prospect of recession usually, but not always, brings about a major stock price downturn. But the prospect of an economic slowdown—and specifically, a GRC downturn—can also trigger smaller corrections and, on occasion, much larger downdrafts in stock prices.

For investors, therefore, it is vital to be on the lookout for not only business cycle recessions, but also the economic slowdowns designated as GRC downturns. Those interested in learning more about business cycles, stock prices, and other financial concepts may want to consider enrolling in one of the best investing courses currently available. Arthur F. National Bureau of Economic Research, National Bureau of Economic Research. What is a Recession? What is an Expansion?

The National Bureau of Economic Research. Economic Cycle Research Institute. Bank for International Settlements. Federal Reserve History. European Commission. Yardeni Research. Portfolio Construction. Markets News. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. Table of Contents. What Is a Business Cycle? Measuring and Dating Business Cycles. The Varieties of Cyclical Experience.

Stock Prices and the Business Cycle. Economy Economics. Part of. Guide to Economic Depression. Part Of. Introduction to Economic Depression. History of Economic Depression. Government Actions. The explanation of fluctuations in aggregate economic activity is one of the primary concerns of macroeconomics and a variety of theories have been proposed to explain them.

Within economics, it has been debated as to whether or not the fluctuations of a business cycle are attributable to external exogenous versus internal endogenous causes. In the first case shocks are stochastic, in the second case shocks are deterministically chaotic and embedded in the economic system. These may also broadly be classed as "supply-side" and "demand-side" explanations: supply-side explanations may be styled, following Say's law , as arguing that " supply creates its own demand ", while demand-side explanations argue that effective demand may fall short of supply, yielding a recession or depression.

This debate has important policy consequences: proponents of exogenous causes of crises such as neoclassicals largely argue for minimal government policy or regulation laissez faire , as absent these external shocks, the market functions, while proponents of endogenous causes of crises such as Keynesians largely argue for larger government policy and regulation, as absent regulation, the market will move from crisis to crisis. This division is not absolute — some classicals including Say argued for government policy to mitigate the damage of economic cycles, despite believing in external causes, while Austrian School economists argue against government involvement as only worsening crises, despite believing in internal causes.

The view of the economic cycle as caused exogenously dates to Say's law , and much debate on endogeneity or exogeneity of causes of the economic cycle is framed in terms of refuting or supporting Say's law; this is also referred to as the " general glut " supply in relation to demand debate.

Until the Keynesian revolution in mainstream economics in the wake of the Great Depression , classical and neoclassical explanations exogenous causes were the mainstream explanation of economic cycles; following the Keynesian revolution, neoclassical macroeconomics was largely rejected. There has been some resurgence of neoclassical approaches in the form of real business cycle RBC theory.

The debate between Keynesians and neo-classical advocates was reawakened following the recession of Mainstream economists working in the neoclassical tradition, as opposed to the Keynesian tradition, have usually viewed the departures of the harmonic working of the market economy as due to exogenous influences, such as the State or its regulations, labor unions, business monopolies, or shocks due to technology or natural causes.

The 19th-century school of under consumptionism also posited endogenous causes for the business cycle, notably the paradox of thrift , and today this previously heterodox school has entered the mainstream in the form of Keynesian economics via the Keynesian revolution.

Mainstream economics views business cycles as essentially "the random summation of random causes". In , Eugen Slutzky observed that summing random numbers, such as the last digits of the Russian state lottery, could generate patterns akin to that we see in business cycles, an observation that has since been repeated many times. This caused economists to move away from viewing business cycles as a cycle that needed to be explained and instead viewing their apparently cyclical nature as a methodological artefact.

This means that what appear to be cyclical phenomena can actually be explained as just random events that are fed into a simple linear model. Thus business cycles are essentially random shocks that average out over time. Mainstream economists have built models of business cycles based the idea that they are caused by random shocks.

While economists have found it difficult to forecast recessions or determine their likely severity, research indicates that longer expansions do not cause following recessions to be more severe. According to Keynesian economics , fluctuations in aggregate demand cause the economy to come to short run equilibrium at levels that are different from the full employment rate of output.

These fluctuations express themselves as the observed business cycles. Keynesian models do not necessarily imply periodic business cycles. However, simple Keynesian models involving the interaction of the Keynesian multiplier and accelerator give rise to cyclical responses to initial shocks.

Paul Samuelson 's "oscillator model" [53] is supposed to account for business cycles thanks to the multiplier and the accelerator. The amplitude of the variations in economic output depends on the level of the investment, for investment determines the level of aggregate output multiplier , and is determined by aggregate demand accelerator. In the Keynesian tradition, Richard Goodwin [54] accounts for cycles in output by the distribution of income between business profits and workers' wages.

The fluctuations in wages are almost the same as in the level of employment wage cycle lags one period behind the employment cycle , for when the economy is at high employment, workers are able to demand rises in wages, whereas in periods of high unemployment, wages tend to fall. According to Goodwin, when unemployment and business profits rise, the output rises.

Income is an essential determinant of the level of imported goods. A higher GDP reflects a higher level of spending on imported goods and services, and vice versa. Therefore, expenditure on imported goods and services fall during a recession and rise during an economic expansion or boom. Import expenditures are commonly considered to be procyclical and cyclical in nature, coincident with the business cycle.

One alternative theory is that the primary cause of economic cycles is due to the credit cycle : the net expansion of credit increase in private credit, equivalently debt, as a percentage of GDP yields economic expansions, while the net contraction causes recessions, and if it persists, depressions. In particular, the bursting of speculative bubbles is seen as the proximate cause of depressions, and this theory places finance and banks at the center of the business cycle.

A primary theory in this vein is the debt deflation theory of Irving Fisher , which he proposed to explain the Great Depression. A more recent complementary theory is the Financial Instability Hypothesis of Hyman Minsky , and the credit theory of economic cycles is often associated with Post-Keynesian economics such as Steve Keen. Post-Keynesian economist Hyman Minsky has proposed an explanation of cycles founded on fluctuations in credit, interest rates and financial frailty, called the Financial Instability Hypothesis.

In an expansion period, interest rates are low and companies easily borrow money from banks to invest. Banks are not reluctant to grant them loans, because expanding economic activity allows business increasing cash flows and therefore they will be able to easily pay back the loans. This process leads to firms becoming excessively indebted, so that they stop investing, and the economy goes into recession.

Within mainstream economics, Keynesian views have been challenged by real business cycle models in which fluctuations are due to random changes in the total productivity factor which are caused by changes in technology as well as the legal and regulatory environment. This theory is most associated with Finn E. Kydland and Edward C. Prescott , and more generally the Chicago school of economics freshwater economics.

They consider that economic crisis and fluctuations cannot stem from a monetary shock, only from an external shock, such as an innovation. This theory explains the nature and causes of economic cycles from the viewpoint of life-cycle of marketable goods.

Vernon stated that some countries specialize in the production and export of technologically new products, while others specialize in the production of already known products. The most developed countries are able to invest large amounts of money in the technological innovations and produce new products, thus obtaining a dynamic comparative advantage over developing countries. Recent research by Georgiy Revyakin proved initial Vernon theory and showed economic cycles in developed countries overran economic cycles in developing countries.

In case of Kondratiev waves such products correlate with fundamental discoveries implemented in production inventions which form the technological paradigm : Richard Arkwright's machines, steam engines, industrial use of electricity, computer invention, etc. Highly competitive market conditions would determine simultaneous technological updates of all economic agents as a result, cycle formation : in case if a manufacturing technology at an enterprise does not meet the current technological environment, — such company loses its competitiveness and eventually goes bankrupt.

Another set of models tries to derive the business cycle from political decisions. However, he did not see this theory as applying under fascism , which would use direct force to destroy labor's power. In recent years, proponents of the "electoral business cycle" theory have argued that incumbent politicians encourage prosperity before elections in order to ensure re-election — and make the citizens pay for it with recessions afterwards.

It then adopts an expansionary policy in the lead up to the next election, hoping to achieve simultaneously low inflation and unemployment on election day. The partisan business cycle suggests that cycles result from the successive elections of administrations with different policy regimes. Regime A adopts expansionary policies, resulting in growth and inflation, but is voted out of office when inflation becomes unacceptably high.

The replacement, Regime B, adopts contractionary policies reducing inflation and growth, and the downwards swing of the cycle. It is voted out of office when unemployment is too high, being replaced by Party A. For Marx, the economy based on production of commodities to be sold in the market is intrinsically prone to crisis. In the heterodox Marxian view, profit is the major engine of the market economy, but business capital profitability has a tendency to fall that recurrently creates crises in which mass unemployment occurs, businesses fail, remaining capital is centralized and concentrated and profitability is recovered.

In the long run, these crises tend to be more severe and the system will eventually fail. Some Marxist authors such as Rosa Luxemburg viewed the lack of purchasing power of workers as a cause of a tendency of supply to be larger than demand, creating crisis, in a model that has similarities with the Keynesian one. Indeed, a number of modern authors have tried to combine Marx's and Keynes's views.

Henryk Grossman [64] reviewed the debates and the counteracting tendencies and Paul Mattick subsequently emphasized the basic differences between the Marxian and the Keynesian perspective. While Keynes saw capitalism as a system worth maintaining and susceptible to efficient regulation, Marx viewed capitalism as a historically doomed system that cannot be put under societal control. The American mathematician and economist Richard M.

Goodwin formalised a Marxist model of business cycles known as the Goodwin Model in which recession was caused by increased bargaining power of workers a result of high employment in boom periods pushing up the wage share of national income, suppressing profits and leading to a breakdown in capital accumulation. Later theorists applying variants of the Goodwin model have identified both short and long period profit-led growth and distribution cycles in the United States and elsewhere.

This cycle is due to the periodic breakdown of the social structure of accumulation, a set of institutions which secure and stabilize capital accumulation. Economists of the heterodox Austrian School argue that business cycles are caused by excessive issuance of credit by banks in fractional reserve banking systems. According to Austrian economists, excessive issuance of bank credit may be exacerbated if central bank monetary policy sets interest rates too low, and the resulting expansion of the money supply causes a "boom" in which resources are misallocated or "malinvested" because of artificially low interest rates.

Eventually, the boom cannot be sustained and is followed by a "bust" in which the malinvestments are liquidated sold for less than their original cost and the money supply contracts. One of the criticisms of the Austrian business cycle theory is based on the observation that the United States suffered recurrent economic crises in the 19th century, notably the Panic of , which occurred prior to the establishment of a U.

Adherents of the Austrian School , such as the historian Thomas Woods , argue that these earlier financial crises were prompted by government and bankers' efforts to expand credit despite restraints imposed by the prevailing gold standard, and are thus consistent with Austrian Business Cycle Theory.

The Austrian explanation of the business cycle differs significantly from the mainstream understanding of business cycles and is generally rejected by mainstream economists. Mainstream economists generally do not support Austrian school explanations for business cycles, on both theoretical as well as real-world empirical grounds. The slope of the yield curve is one of the most powerful predictors of future economic growth, inflation, and recessions.

Louis Fed. An inverted yield curve is often a harbinger of recession. A positively sloped yield curve is often a harbinger of inflationary growth. Work by Arturo Estrella and Tobias Adrian has established the predictive power of an inverted yield curve to signal a recession. Their models show that when the difference between short-term interest rates they use 3-month T-bills and long-term interest rates year Treasury bonds at the end of a federal reserve tightening cycle is negative or less than 93 basis points positive that a rise in unemployment usually occurs.

All the recessions in the United States since up through have been preceded by an inverted yield curve year vs. Over the same time frame, every occurrence of an inverted yield curve has been followed by recession as declared by the NBER business cycle dating committee. Estrella and others have postulated that the yield curve affects the business cycle via the balance sheet of banks or bank-like financial institutions. When the yield curve is upward sloping, banks can profitably take-in short term deposits and make long-term loans so they are eager to supply credit to borrowers.

This eventually leads to a credit bubble. Henry George claimed land price fluctuations were the primary cause of most business cycles. Many social indicators, such as mental health, crimes, and suicides, worsen during economic recessions though general mortality tends to fall, and it is in expansions when it tends to increase.

Since the s, following the Keynesian revolution , most governments of developed nations have seen the mitigation of the business cycle as part of the responsibility of government, under the rubric of stabilization policy. Since in the Keynesian view, recessions are caused by inadequate aggregate demand, when a recession occurs the government should increase the amount of aggregate demand and bring the economy back into equilibrium.

This the government can do in two ways, firstly by increasing the money supply expansionary monetary policy and secondly by increasing government spending or cutting taxes expansionary fiscal policy. By contrast, some economists, notably New classical economist Robert Lucas , argue that the welfare cost of business cycles are very small to negligible, and that governments should focus on long-term growth instead of stabilization.

However, even according to Keynesian theory , managing economic policy to smooth out the cycle is a difficult task in a society with a complex economy. Some theorists, notably those who believe in Marxian economics , believe that this difficulty is insurmountable. Karl Marx claimed that recurrent business cycle crises were an inevitable result of the operations of the capitalistic system.

In this view, all that the government can do is to change the timing of economic crises. The crisis could also show up in a different form , for example as severe inflation or a steadily increasing government deficit. Worse, by delaying a crisis, government policy is seen as making it more dramatic and thus more painful. Additionally, since the s neoclassical economists have played down the ability of Keynesian policies to manage an economy.

Since the s, economists like Nobel Laureates Milton Friedman and Edmund Phelps have made ground in their arguments that inflationary expectations negate the Phillips curve in the long run. The stagflation of the s provided striking support for their theories while proving a dilemma for Keynesian policies, which appeared to necessitate both expansionary policies to mitigate recession and contractionary policies to reduce inflation.

Friedman has gone so far as to argue that all the central bank of a country should do is to avoid making large mistakes, as he believes they did by contracting the money supply very rapidly in the face of the Wall Street Crash of , in which they made what would have been a recession into the Great Depression. From Wikipedia, the free encyclopedia. Fluctuation in degree of utilization of production potential of an economy. Basic concepts. Fiscal Monetary Commercial Central bank.

Related fields. Econometrics Economic statistics Monetary economics Development economics International economics. Edward C. Sargent Paul Krugman N. Gregory Mankiw. See also. Macroeconomic model Publications in macroeconomics Economics Applied Microeconomics Political economy Mathematical economics. Economic systems. Economic theories.

Related topics and criticism. Anti-capitalism Capitalist state Consumerism Crisis theory Criticism of capitalism Critique of political economy Critique of work Cronyism Culture of capitalism Evergreening Exploitation of labour Globalization History History of theory Market economy Periodizations of capitalism Perspectives on capitalism Post-capitalism Speculation Spontaneous order Venture philanthropy Wage slavery. This box: view talk edit. Main article: Mainstream economics.

Main articles: Credit cycle and Debt deflation. Main article: Real business-cycle theory. Main article: Marxian economics. Main article: Austrian business cycle theory. Main article: Yield curve. Effective Federal Funds Rate. Main article: Georgism. Dynamic stochastic general equilibrium Information revolution Inventory investment over the business cycle List of commodity booms List of financial crises in the United States Market trend Skyscraper Index Welfare cost of business cycles World-systems theory.

Review of Economics and Statistics. S2CID Journal of Econometrics. Archived from the original on History of Political Economy. Lee, Economic fluctuations. Homewood, IL, Richard D. History of Economic Analysis. JSTOR Archived from the original PDF on Retrieved New York: D. Appleton and Co. ISBN Ludwig Von Mises Inst.

Archived PDF from the original on Opening line of the Preface. The Public Historian. ISSN The New York Times. Eurasian Geography and Economics. Burns and W. Burns, Introduction. In: Wesley C. Mitchell, What happens during business cycles: A progress report. Archived from the original on February 19, Oil and the macroeconomy, in S. International Journal of Forecasting. Journal of Economic Perspectives. Economic and Labour Market Review".

International Journal of Forecasting". Korotayev, Andrey V. Structure and Dynamics. Indian Academy of Sciences — Conference Series.

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Neither, of course, are the hunches and intuitions of entrepreneurs. However, taken together and applied carefully in view of what you know about your particular industry and company, economic forecasts can help you to prepare for changes in the direction of the economy before or soon after these changes occur.

Business cycles are also affected by seasons of the year, holidays and other recurring events. Bathing suits and sunscreen, for example, sell well in spring and summer, poorly in fall and winter. The opposite is true of coats and gloves. Less well-known examples include fast-food outlets and other restaurants regularly suffering sales declines in the winter and boosts in the summer, especially in northern climes. Don't underestimate the potential effect of seasonality.

Cooler maker Igloo's sales during June, its busiest month, are 10 times higher than those in its slowest months. There are many things you can do to smooth out seasonality--and you should do some or all of them if you want to grow steadily. Seasonality is a management challenge; it makes it harder for your company to grow when you experience wide swings in demand. If seasonality is causing you problems, think of ways to generate steady sales.

For example, one mail order flower company gets as much as 40 percent of its revenue from a flower-of-the-month-club program, which helps smooth out the seasonality of this business. One of the best-known examples of the power of seasons on business is the year-end holiday sales boom that packs half the year's sales into a few months for many retailers.

But the timing of holidays is even more sensitive than it may appear. Holidays that don't occur on the same calendar date each year may have different effects on business, depending on when they actually take place. Easter is a good example. It may occur during a broad spread of weeks in March and April.

If it's early, retailers in the North may be hurt because they've displayed swimming suits that don't appeal to shoppers who are still wearing their winter coats. If it's late, on the other hand, retailers have to be ready to supply summer tastes in goods along with their Easter displays. Highly seasonal businesses must avoid the tempting budgeting shortcut of taking the projection for first-year sales and dividing it by If you have wide-ranging changes in cash flow needs, that kind of budgeting error could sink you.

So enter sales and cash needs on a monthly basis, taking into account the expected effect of the seasons on each month. Otherwise, planning for cycles is largely a matter of recognizing that they exist. This may mean not assuming that the current good times will go on forever. Plan for tougher times by limiting the costs you add to your business. In particular, be wary of paying higher recurring expenses such as rent. Entrepreneurs tend to take on unnecessary expenses when times are good, but this can sink you if a recession strikes.

Look out for overly lavish expense accounts, over-reliance on high-priced professional advisors, products that don't carry their weight, and even marginal customers you'd be better off without. Trimming these costs when times are good will help your profits now and may make the difference between success and failure when the cycle turns the other way.

Also think twice before adding expenses that may be hard to cut, or even cost more to cut than they do to keep. Chief among these costs is people. It can be emotionally as well as financially painful to lay off workers in the event of an economic downturn. And the costs for severance pay, unemployment insurance, outplacement and retraining may also be steep.

Remember: Even if your income statement and balance sheet are strong now, you have to practice cost containment to be ready for the next recession. Equipment that you use to manufacture a product, provide a service or use to sell, store and deliver merchandise. This equipment has an extended life so that it is properly regarded as a fixed asset. The process of receiving, packaging and shipping orders for goods.

The process of bringing goods from one country for the purpose of reselling them in another country. An expense item set up to express the diminishing life expectancy and value of any equipment including vehicles. Depreciation is set up over a fixed period of time based on current tax regulation. Items fully depreciated are no longer carried as assets on the company books. Emily Rella. John Kitchens. Skip to content Profile Avatar. Subscribe to Entrepreneur. Magazine Subscriptions. It's the period when economic activity is on the way down.

When the GDP has declined for two consecutive quarters, the economy is often considered to be in a recession. Even after a recession is officially over, that doesn't mean that the economy has returned to its original shape and size. Trough: IF the peak is the cycle's high point, the trough is its low point. It occurs when the recession, or contraction phase, bottoms out and starts to rebound into an expansion phase — and the business cycle starts all over again.

The rebound is not always quick, nor is it a straight line, along the way toward full economic recovery. The most recent trough was in April Though often used interchangeably, a business cycle is technically different from a market cycle. A market cycle specifically refers to the different growth and decline stages of the stock market, while the business cycle reflects the economy as a whole.

But the two are definitely related. The stock market is greatly influenced by the phases of a business cycle and generally mirrors its stages. During the contractionary phase of a cycle, investors sell their holdings, depressing stock prices — a bear market. In the expansionary phase, the opposite occurs: Investors go on a buying spree, causing stock prices to rise — a bull market. Business cycles have no defined time frames.

A business cycle can be short, lasting a few months, or long, lasting several years. Generally, periods of expansion are more prolonged than periods of contraction, but the actual lengths can vary. Since the end of World War II, the average period of expansion in the US lasted 65 months, and the average contraction lasted about 11 months, according to the Congressional Research Service.

Most recently, the US hit a peak in February , and before that was in a period of expansion that had lasted roughly months, making it the longest in recorded history. The many variables in an economy fluctuate differently over time, causing shifts in the economy, and non-economic factors, such as natural disasters and disease, play a part in shaping the economy as well.

In recent history, the subprime mortgage crisis of was one such shock, and the onset of the COVID pandemic in was another creating a two-month recession. From technological innovations to wars, a variety of things can shift a business cycle's phases. But, according to the Congressional Research Service, the key influence boils down to the aggregate supply and demand within an economy — economist-speak for the total spending that individuals and companies do.

When that demand decreases, a contraction occurs. Likewise, when demand increases, an expansion occurs. The fact that business cycles move in natural phases doesn't mean they can't be influenced. Countries can and do try to manage the various stages — slowing them down or speeding them up — using monetary policy and fiscal policy.

Fiscal policy is carried out by the government; monetary policy is carried out by a nation's central bank. For example, when an economy is in a contraction, particularly a recession, governments use expansionary fiscal policy, which consists of increasing expenditures on government projects or cutting taxes.

These moves provide increased levels of disposable income that consumers can spend, which in turn stimulates economic growth. Similarly, a central bank — like the Federal Reserve in the US — will use an expansionary monetary policy to end a contractionary period by reducing interest rates, which makes borrowing money cheaper, thus stimulating spending, and eventually the economy. If an economy is growing too fast, governments will employ a contractionary monetary policy , which involves cutting spending and increasing taxes.

This reduces the amount of disposable income to spend, slowing things down. To employ a contractionary monetary policy , a central bank will increase interest rates, making borrowing more expensive and therefore spending money less attractive.

Even though they seem like something that only affects "the economy," business cycles have plenty of real-world implications for individuals. Recognizing the current cycle can influence people and their lifestyle decisions. For example, if we're in a contraction phase, finding work often becomes more difficult.

Individuals may take up less-than-ideal jobs just to ensure they are making an income, and and hope for a better position once the economy improves. It may also influence spending, especially when making huge decisions like buying a home or a car. Understanding the business cycle is also crucial for investors.

Knowing which assets — especially stocks — perform well in the different phases of a business cycle can help an investor avoid certain risks and even grow the value of their portfolio in a contractionary phase. For example, certain industries remain crucial regardless of the current business cycle such as healthcare and energy.

On the other hand, it may be best to stay away from speculative assets and high-risk stocks. When making these investment decisions, it's a good idea to start by looking at a company's balance sheet , which will tell you a company's assets and liabilities. A strong balance sheet has more assets than liabilities, even when the market looks like it's headed into a contraction phase.

Individuals can't do much on their own to affect a business cycle, and weathering its down phases can be tough. Still, it might help you sleep better at night knowing "it's a cycle and that we won't be there forever," says Reinhart. Credit Cards Angle down icon An icon in the shape of an angle pointing down. Investing Angle down icon An icon in the shape of an angle pointing down. Insurance Angle down icon An icon in the shape of an angle pointing down. Savings Angle down icon An icon in the shape of an angle pointing down.

Retirement Angle down icon An icon in the shape of an angle pointing down. Mortgages Angle down icon An icon in the shape of an angle pointing down.

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Thus, irregularity in the pace of innovations in new products or processes becomes a source of business fluctuations. Variations in inventories—expansion and contraction in the level of inventories of goods kept by businesses—also contribute to business cycles.

Inventories are the stocks of goods firms keep on hand to meet demand for their products. How do variations in the level of inventories trigger changes in a business cycle? Usually, during a business downturn, firms let their inventories decline. As inventories dwindle, businesses eventually use down their inventories to the point where they are short.

This, in turn, starts an increase in inventory levels as companies begin to produce more than is sold, leading to an economic expansion. This expansion continues as long as the rate of increase in sales holds up and producers continue to increase inventories at the preceding rate. However, as the rate of increase in sales slows, firms begin to cut back on their inventory accumulation.

The subsequent reduction in inventory investment dampens the economic expansion, and eventually causes an economic downturn. The process then repeats itself all over again. It should be noted that while variations in inventory levels impact overall rates of economic growth, the resulting business cycles are not really long. The business cycles generated by fluctuations in inventories are called minor or short business cycles. These periods, which usually last about two to four years, are sometimes also called inventory cycles.

Variations in government spending are yet another source of business fluctuations. This may appear to be an unlikely source, as the government is widely considered to be a stabilizing force in the economy rather than a source of economic fluctuations or instability. Nevertheless, government spending has been a major destabilizing force on several occasions, especially during and after wars.

Government spending increased by an enormous amount during World War II, leading to an economic expansion that continued for several years after the war. These also led to economic expansions. However, government spending not only contributes to economic expansions, but economic contractions as well. In fact, the recession of —54 was caused by the reduction in government spending after the Korean War ended. More recently, the end of the Cold War resulted in a reduction in defense spending by the United States that had a pronounced impact on certain defense-dependent industries and geographic regions.

Many economists have hypothesized that business cycles are the result of the politically motivated use of macroeconomic policies monetary and fiscal policies that are designed to serve the interest of politicians running for re-election. The theory of political business cycles is predicated on the belief that elected officials the president, members of Congress, governors, etc.

Variations in the nation's monetary policies, independent of changes induced by political pressures, are an important influence in business cycles as well. The Central Bank, in the case of the United States, the Federal Reserve Bank, has two legislated goals—price stability and full employment.

Its role in monetary policy is a key to managing business cycles and has an important impact on consumer and investor confidence as well. The difference between exports and imports is the net foreign demand for goods and services, also called net exports. Because net exports are a component of the aggregate demand in the economy, variations in exports and imports can lead to business fluctuations as well. There are many reasons for variations in exports and imports over time.

Growth in the gross domestic product of an economy is the most important determinant of its demand for imported goods—as people's incomes grow, their appetite for additional goods and services, including goods produced abroad, increases. The opposite holds when foreign economies are growing—growth in incomes in foreign countries also leads to an increased demand for imported goods by the residents of these countries.

This, in turn, causes U. Currency exchange rates can also have a dramatic impact on international trade—and hence, domestic business cycles—as well. Business cycles are difficult to anticipate accurately, in part because of the number of variables involved in large economic systems.

Nonetheless, the importance of tracking and understanding business cycles has lead to a great deal of study of the subject and knowledge about the subject. It was as a result somewhat surprising when, in the s, the nation found itself stuck in a period of seemingly contradictory economic conditions, slow economic growth and rising inflation. The condition was named stagflation and paralyzed the U. Another somewhat unexpected business cycle phenomenon has occurred in the early s.

It is what has come to be known as the "jobless recovery. The most recent trough occurred in November , inaugurating an expansion. The reasons for the jobless recovery are not fully understood but are the cause of much debate within the economic and political circles.

Within this debate there are four leading explanations that analysts have given for the jobless recovery. According to a study published in Economic Perspectives in the summer of , these four explanations are:. Small business owners can take several steps to help ensure that their establishments weather business cycles with a minimum of uncertainty and damage.

The concept of cycle management is earning adherents who agree that strategies that work at the bottom of a cycle need to be adopted as much as those which work at the top of a cycle. While there is no definitive formula for every company, the approaches generally emphasize a long-term view focused on a company's core strengths and stressing the need to plan with greater discretion at all times. Essentially, efforts are made to adjust a company's operations in such a manner that it maintains an even keel through the ups and downs of a business cycle.

Aaronson, Daniel, and Ellen R. Rissman; Daniel G. Summer Hall, Robert, and Martin Feldstein. National Bureau of Economic Research, 21 October Hendrix, Craig, and Jan Amonette. Nardi Spiller, Christina. Walsh, Max. Top Stories. Top Videos. An imbalance in labor available by sector. The emergence of just-in-time hiring practices. The rising cost of health care benefits. Rapidly increasing productivity not being off-set by aggregate demand.

Only time and further analysis will show which of these factors, or which combination of factors explains the advent of a jobless recovery. Neil Shister, editorial director of the World Trade summarizes a discussion of the jobless recovery this way, "The culprit is ourselves. We have become dramatically more productive. Specific tips for managing business cycle downturns include the following:.

Flexibility—Having a flexible business plan allows for development times that span the entire cycle and includes various recession-resistant funding structures. Long-term Planning—Consultants encourage small businesses to adopt a moderate stance in their long-range forecasting.

It also sucks out money from the economy and re-directs it to the banks. As the interest rates are so high, businesses and consumers reduce their demand for credit. In turn, there is a contraction in the money supply which can lead to deflation.

The effects of high interest rates can be dire if not managed correctly and subtly by central banks. If the interest rates are increased too fast, too high, and too rapidly, we will see the aforementioned effects such as lower business investment and deflation. Therefore, it can contribute to a transition towards an economic contraction in the business cycle. Inflation can create a drain on consumer incomes as it decreases its value year on year. Therefore, if firms do not increase wages in line with inflation, the average worker will be able to afford less than before.

If real incomes decline, it means consumers have less income to spend on goods and services in the economy. In turn, a prolonged period of decline in real incomes can contribute to an economic contraction in the business cycle. Higher taxes mean the average consumer has less disposable income, which can contribute to a decline in consumption. Consequently, as consumers demand fewer goods, the overall economy can slide into the contraction phase of the business cycle.

With consumers spending less, there is less demand for goods and services. In turn, the need for businesses to employ as many workers also declines, meaning an increase in employment. We then have a potential downwards spiral by which lower consumer demand leads to unemployment, which leads to a further reduction in demand.

These are only potential effects and depend on how extreme the tax rises are for and who they are placed on. It also depends on how the taxes are spent. For instance, they may be used to re-distribute to the poorer in society. This may offset some of the negative effects as lower-income households tend to spend a higher proportion of their incomes, thereby stimulating consumer demand. However, they may be used to repay government debt. In which case, there is likely to be a deflationary effect that could create further problems.

As governments reduce spending, it can create a contractionary effect on the business cycle. However, it depends if it is also aligned with a decrease in taxation and whether the savings are spent in reducing debt. If the government reduces spending to pay off its debt, it can create a trough in the business cycle. This is because the government is still taking the same revenues from the public.

There is a negative effect as the government spends less, which is a component of GDP, therefore contributing to a contraction. However, there is a positive effect. If they are paying off debt, this increases the amount of credit available to the rest of the economy. So it may make it easier for businesses to obtain credit to expand their investment.

When business confidence is high, they are more likely to spend and invest. Therefore, we see an expansion in the business cycle. Business confidence may increase because of growing consumer demand, or a reduction in uncertainty. In turn, businesses are more likely to invest as they anticipate further demand in the future.

If the productivity of the economy on the whole increases, it means fewer resources are needed to produce the same level of output. This makes it cheaper to produce goods, meaning lower prices can be afforded. In turn, these savings are passed on into the wider economy. Whether this is through lower prices to the consumer or higher profits to businesses. What this does is create more funds for consumers and businesses to spend elsewhere. In turn, this increases consumer demand and business investment in the long run.

As countries start to reduce trade barriers, we see cheaper consumer goods coming in. This acts in a similar way to productivity gains in the fact that goods can become cheaper to the consumer. As cheaper goods come into the country, consumers have more disposable income to spend on other goods.

This means greater demand elsewhere in the economy, which can stimulate employment and push the economy into the expansion phase in the business cycle. So business cycles occur through increases and decreases in economic output, which are largely a result of fluctuations in aggregate demand.

However, how does the cycle work? The whole process works through 4 phases: expansion, peak, contraction, and trough. This is otherwise known as the 4 phases of the business cycle. As the economy grows, it goes into an expansionary period. This occurs when aggregate demand is growing rapidly. In turn, the economy will reach a period whereby aggregate demand stalls; known as the peak phase.

There is little if any economic growth. Moving to the next stage, there is a contraction whereby fewer goods and services are being demanded. Then, the economy goes into a trough. Aggregate demand may slowly decline, but very slowly. This will occur until the economy picks up back into the expansion phase. In the business cycle, there are 4 phases — expansion, peak, contraction, and trough.

This cycles through periods of economic growth and back into economic rececsion. One of the key questions asked is how long there is between phases. A legitimate question seeing as the graph illustrates a repetitive trend.

However, to answer the question; there is no set trend between phases. An expansion may last 2 years or 20 years. It depends on the behaviour of the whole population and how that translates into aggregate demand.