The Business Cycle

What has upswings and downturns, troughs, peaks, and plateaus? Though such terms could easily describe a roller coaster ride, in fact they are commonly used to refer to something known as the business cycle.

The business cycle — also known as the economic cycle — refers to fluctuations in economic activity over several months or years. Tracking the cycle helps professionals make forecasts about the direction of the economy. The National Bureau of Economic Research makes official declarations about the economic cycle, based on factors such as the growth of the gross domestic product, household income, and employment rates.

Tip: Not Smooth. During both recessions and expansions, the economy can go through brief reversals in economic activity. A recession may include a short period of expansion followed by further decline; an expansion may include a short period of contraction followed by further growth.
Source: National Bureau of Economic Research, 2014

Recovery & Recession

An upswing, or recovery, occurs when the economic indicators improve over time. A recession occurs when the same indicators go through a contraction. A particularly long or severe recession is referred to as a depression.

Despite being called a cycle, it’s important to understand that the business cycle is not regular. It doesn’t happen at set intervals. Some recoveries have lasted several years while others are measured in months. Recessions, too, can last for a number of years or be as short as a few months.

Moving in Waves

The economic cycle moves through periods of recession and recovery. Despite being called a cycle, it’s important to understand that the economic cycle is not regular.

Stages of Cycle

So how should investors look at information about the business cycle?

Investors who understand that the economy moves through periods of recovery and recession may have a better perspective on the overall cycle. During recovery, understanding whether the economy is at an early or late stage of the cycle may influence certain investment decisions. Conversely, during a recession, deciphering whether the economy is passing through a shallow or deep cycle also may influence certain decisions.

Fast Fact: Who Says? The peaks and troughs of the economic cycle are reported by the National Bureau of Economic Research, a private, nonprofit, nonpartisan research organization. Their website is nber.org.

Generally, the business cycle will transition from recovery to recession — and recession to recovery — over several months. Understanding that the economy travels through cycles may help you put current business conditions in better perspective.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite, to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2014 FMG Suite.