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Money and Finance
Money and Finance
Economic Cycle or Business Cycle
The economies of countries throughout the world are always changing. Sometimes they are growing and everything is great, but at other times they are shrinking and times are tough.
All economies are going through a constant cycle of changes. This cycle can be described by a series of stages. You've probably heard people say things like "the economy is booming" or "we are in a recession." These are some of the various stages of the economic cycle. It is sometimes called the business cycle.
Stages of the Economic Cycle
We will describe four of the basic stages of the economic cycle below: 1) expansion, 2) slowdown, 3) recession, and 4)recovery. The current state of most economies can be described by one of the stages below.
Expansion is a time of strong economic growth. People tend to be the most optimistic during the expansion stage. Some economists called the expansion stage the "boom" stage. Indicators of the expansion stage include:
- New businesses opening and people investing in the stock market
- Wages increasing allowing people to make more money
- Lots of new jobs are created and unemployment drops
- Overall consumer confidence is high
At some point the rapid growth of the expansion stage has to come to an end. When the economy starts to slow, but is still growing, this is called the slowdown stage. Sometimes economists call a slowdown a "downturn" in the economy. Indicators of an economic slowdown include:
- Interest rates on loans rise
- Prices on goods may rise causing a higher rate of inflation
- Stock market prices drop
- Consumers begin to worry, causing them to save more and spend less
- Businesses stop hiring new employees
A recession is when the economy stops growing. Economists define a recession as two quarters in a row where the GDP (Gross Domestic Product) gets smaller. A lot of times a recession is started by some sort of major negative event. It could be something like a number of banks failing, a stock market crash, or even a terrorist attack (like in the 2001 9-11 attack). Indicators of an economic recession include:
- Increase in companies going bankrupt
- Increase in people losing their jobs and unemployment
- Inflation slows down because people aren't spending their money
- A decline in consumer confidence
- A rise in the government deficit
When the economy starts to come out of a recession and begins to improve, this is called the recovery stage. Indicators of an economic recovery include:
How long does each stage of the cycle last?
- Unemployment rates start to improve
- An increase in new job openings
- People start to increase their spending
- Low interest rates
- Companies begin to make better profits
There is no set time on how long each stage will last. Sometimes countries languish for years in a very slow recovery. Sometimes they experience a quick expansion and then immediately enter into a slowdown. In some cases, an economic cycle can skip the recession stage altogether and just enter into a long slowdown state. Economists call this a "soft landing."
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Note: This information is not to be used for individual legal, tax, or investment advice. You should always contact a professional financial or tax advisor before making financial decisions.
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