What Is an Economic Recovery?

Economic recovery is a business cycle stage following a recession that is characterized by a sustained period of improving business activity. During an economic recovery, gross domestic product (GDP) growth remains positive with ebbs and flows as the economy rebounds.

An economic recovery is the first stage of expansion. Generally, economists breakdown the economic business cycle phases into four categories: expansion, peak, contraction, and trough. GDP is usually the primary defining indicator of an economy’s business cycle phase though there are several indicators regularly followed to gauge an economy’s overall health and status.

Understanding an Economic Recovery

Market economies experience ups and downs for several reasons. Economies can be impacted by all kinds of factors, including revolutions, crises, and global influences. Economic theory recognizes four key business cycle phases that are used to track and understand the health of an economy. The four economic business cycle phases include: expansion, peak, contraction, and trough.

An economic recovery is part of an economy’s expansionary phase. It occurs after a recession as an expansion is starting to take hold.

Recessions occur during the contractionary phase. Not every period of contraction is severe enough to be designated as a recession. In the United States, the most widely accepted definition of a recession is if there are two consecutive quarters of negative GDP growth.

Troughs and peaks occur at the bottom and top of the business cycle phases following contraction and expansion respectively. When an economy hits rock bottom in a recession, a trough is signaled. This is usually shown by an extreme low in GDP, along with low inflation, and high unemployment. When an economy reports new highs, a peak occurs. This is usually shown by a peak GDP level with high inflation and low unemployment.

Much like the start of a contraction, an economic recovery is not always easy to recognize until at least several months after it has begun. Typically, an economic recovery follows a trough and is characterized by multiple consecutive quarters of positive GDP growth following the two consecutive negative quarters of GDP growth that define a recession. During a recovery, GDP may grow steadily or experience sharp jumps. Overall recoveries will have positive quarterly growth rates that help an economy build momentum for further expansion.

In all phases of the business cycle, economists focus on key economic indicators to determine business cycle classifications and status. Each stage of an economy’s cycle is important to understand and assess because it is usually a key driver in fiscal and monetary policy decisions. GDP is often the most important economic indicator but there are also others.

Key Takeaways

  • Economists classify economic business cycles into four phases: expansion, contraction, peak, and trough.
  • An economic recovery follows after the contraction and trough phases, occurring as part of the expansionary business cycle phase.
  • An economic recovery is characterized by a sustained period of improving business activity.
  • GDP is usually the primary indicator for classifying an economic recovery but many indicators are also considered.

Speculating on Indicators

Economists often play a big part in defining an economy’s business cycle phase as well as the stages of economic growth or contraction it may be experiencing. To assess the economy, economists look at both leading and lagging economic indicators in their analysis.

Leading indicators can be things such as the stock market, which often rises ahead of an economic recovery. This is usually because future expectations drive stock prices. On the other hand, employment is typically somewhat of a lagging indicator. Unemployment often remains high even as the economy begins to recover because many employers will not hire additional personnel until they are reasonably confident there is a long-term need for new hiring.

GDP is usually the key indicator of an economic phase with two quarters of consecutive negative GDP growth indicating a recession. Other economic indicators for consideration can include consumer confidence and inflation.

Economic Recovery Considerations

Fiscal and monetary policy actions are taken by regulators and often guided by an economy’s business cycle. Economists, and central banks specifically, assess key drivers of the economy on a regular basis. In the U.S., the Federal Reserve’s primary goals are to maximize sustainable employment, maintain price stability, and moderate long-term interest rates. All of which are important factors for the health of the economy.

To achieve its goals, the Fed carefully considers the economic business cycle determined by gross domestic product (GDP) growth along with inflation data and unemployment statistics. Combined, these three statistics are known as the economy’s primary economic indicators. The Fed uses its monetary policy tools to help influence these factors, achieve its goals, and take steps to help the economy expand. Depending on the economic environment and monetary policy actions, some changes to GDP, inflation, and employment measures can be seen within months but commonly it can take several quarters or years to see any substantial results or determine a trend.

Economic Recovery Examples

A recovery and expansion period can last for years. Recoveries can be the result of many influences. The business sector may fuel economic recovery through revolutionary innovations. Dotcom and internet technologies are one example of revolutionary innovations that fueled economic recovery and expansion in the early twenty-first century. Legislation and regulation can also be a key factor for economic recovery. The government’s legislation and the Dodd-Frank Act were key factors helping to induce a recovery following the 2008 Financial Crisis. The Federal Reserve and presidential administrations can also be important in helping economic recovery.

The economic recovery from the 2008 financial crisis and recession began in June 2009. Real GDP, which had contracted by 5.4% in the first quarter of 2009 and 0.5% in the second quarter, began growing again in the third quarter of 2009. The Dow Jones Industrial Average, a popular proxy for economic performance and a leading indicator, had already been rising for four months after bottoming out in Feb. 2009.

28 Years

The longest recovery and expansion period on record held by the economy of Australia.

Through September 2019, the United States has reported a record timeframe for recovery and expansion at over 10 years. However, this is far from the world record for expansions at 28 years by Australia. Most economists and legislators seek to do all they can to help an economy remain in a recovery and expansion period for as long as possible.