3. TABLE OF CONTENTS
What Is a Business Cycle?
Understanding Business Cycles
Stages of the Business Cycle
Measuring the Business Cycle
Economists and the Business Cycle
Investors and the Business Cycle
The Business Cycle and Markets
4. What Is a Business Cycle?
The business cycle describes the rise and fall in production
output of goods and services in an economy. Business cycles
are generally measured using the rise and fall in the real gross
domestic product (GDP) or the GDP adjusted for inflation.
5. Business cycle cont…
The business cycle should not be confused with market cycles, which
are measured using broad stock market indices. The business cycle is also
different from the debt cycle, which refers to the rise and fall in
household and government debt.
The business cycle is also known as the economic cycle or trade cycle.
6. Understanding Business Cycles
Business cycles are fluctuations in economic activity that an economy
experiences over a period of time. Actual fluctuations in real GDP, however,
are far from consistent. These fluctuations include output from all sectors
including households, nonprofits, governments, as well as business output.
"Output cycle" is thus a better description of what is measured.
7. Cont….
The business cycle is characterized by expansion and contraction. During
expansion, the economy experiences growth, while a contraction is a period of
economic decline. Contractions are also called recessions.
8. Stages of the Business
Cycle
All business cycles are characterized by several
different stages, as seen below.
9. Stages of the Business Cycle (cont…)
1. Expansion
This is the first stage. When the expansion occurs, there is an increase in
employment, incomes, production, and sales. People generally pay their debts on
time. The economy has a steady flow in the money supply and investment is
booming.
2. Peak
The second stage is a peak when the economy hits a snag, having reached the
maximum level of growth. Prices hit their highest level, and economic indicators
stop growing. Many people start to restructure as the economy's growth starts to
reverse.
10. Stages of the Business Cycle (cont…)
3. Recession
These are periods of contraction. During a recession, unemployment rises,
production slows down, sales start to drop because of a decline in demand, and
incomes become stagnant or decline.
4. Depression
Economic growth continues to drop while unemployment rises and production
plummets. Consumers and businesses find it hard to secure credit, trade is
reduced, and bankruptcies start to increase. Consumer confidence and
investment levels also drop.
11. Stages of the Business Cycle (cont…)
5. Trough
This period marks the end of the depression, leading an economy into the next
step: recovery.
6. Recovery
In this stage, the economy starts to turn around. Low prices spur an increase in
demand, employment and production start to rise, and lenders start to open up
their credit coffers. This stage marks the end of one business cycle.
12. Economists and the
Business Cycle
Some economists believe that the business cycle is
a natural part of the economy
13. Economists and the Business Cycle
Some economists believe that the business cycle is a natural part of the
economy. But there are others who believe that central banks indirectly control
the cycle by intervening with monetary policy. When the economy is expanding
too quickly, central bankers will step in and tighten the money supply and raise
interest rates.
14. Investors and the Business Cycle
investors may be able to use the business cycle to profit from the market by
choosing the right stocks at the right time.
For example, an investor may choose to invest in commodities and technology
stocks at the end of the business cycle because they may be cheap, and then sell
them during the early part of an expansion.
15. The Business Cycle and
Markets
Recessions can extract a tremendous toll on stock
markets.
16. The Business Cycle and Markets
Recessions can extract a tremendous toll on stock markets. Most major equity
indexes around the world endured declines of over 50% in the 18-month period
of the Great Recession, which was the worst global contraction since the 1930s
Depression. Global equities also underwent a significant correction in the 2001
recession, with the Nasdaq Composite among the worst-hit. The index plunged
by almost 80% from its 2001 peak to its 2002 low.
Importantly, recessions due to credit bubbles bursting are far worse on income
and consumption than from stock market speculative bubbles bursting.
