An economy, during an expansionary phase, will see an increase in overall business activity and output. Corporate sales, manufacturing output, wages and savings will all increase while the economy is expanding or growing. An economy cannot continue to grow indefinitely and GDP will top out at the peak in the business cycle. An economic expansion is characterized by:
- Increasing GDP
- Rising consumer demand
- Rising stock market
- Rising production
- Rising real estate prices
As the economy tops out, the GDP reaches its maximum output for this cycle as wages, manufacturing and savings all peak.
During a contraction, GDP falls, along with productivity, wages and savings. Unemployment begins to rise, the stock market begins to fall, and corporate profits decline as inventories rise.
The economy bottoms out in the trough as GDP hits its lowest level for the cycle. As GDP bottoms out, unemployment reaches its highest level, wages bottom out, and savings bottom out. The economy is now poised to enter a new expansionary phase and start the cycle all over again.
A recession is defined as a period of declining GDP, which lasts at least six months or two quarters.
A depression is characterized by a decline in GDP, which lasts at least 18 months or six consecutive quarters.
InsightsUnderstanding the business cycle and your own investment style can help you cope with an economic decline.
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