Trough

What is a 'Trough'

A trough is the stage of the economy's business cycle that marks the end of a period of declining business activity and the transition to expansion.

In general, the business cycle is said to go through expansion, then a peak, followed by contraction and then finally bottoming out with the trough.


Trough

BREAKING DOWN 'Trough'

Economists use several metrics to track the economic cycle throughout its four phases. The most recognizable of these is gross domestic product (GDP), which is the value of all goods and services that a country produces.

Employment levels also offer a strong indicator of economic cycle placement. Unemployment levels of 5% or below are consistent with full employment and are indicative of economic expansion. When the unemployment rate rises from month to month, the economy has probably entered a contractionary phase; when it bottoms out, a trough is signaled.

Another method to gauge the economic cycle is by looking at incomes and wages. These increase during expansion, recede during contraction and bottom out during a trough. The major U.S. stock market indices, such as the Dow Jones Industrial Average (DJIA) and Standard & Poor's (S&P) 500 Index also track closely with the economic cycle. Looking at a historical graph of the stock market, the most obvious downturns, such as during the early 1980s and late 2000s, coincide with the sharpest periods of economic contraction. The nadirs shown on the graph coincide with economic troughs, or transitions from contraction back to expansion.

Examples of Economic Troughs

As of 2016, the most recent economic trough occurred in June 2009. This date marked the official end of the Great Recession, which began following the economic peak reached in December 2007. At the end of 2007, the U.S. GDP reached an all-time high of $14.99 trillion. It then fell steadily for the next year and a half, a period of strong economic contraction. In June 2009, it bottomed out at $14.36 trillion. A period of expansion ensued, with the GDP eventually surpassing its 2007 high, reaching $15.02 trillion by September 2011.

During the U.S. recession of the early 1990s, the trough occurred in March 1991. At that date, the GDP stood at $8.87, down from $8.98 trillion in July 1990, the month the recession began. The recovery to this recession, marked by the ensuing expansionary phase, was robust, with the GDP surpassing $9 trillion for the first time ever before the end of 1991.



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