What is a Sluggish Economy?

A sluggish economy is a state of an economy in which growth is slow, flat or declining. The term can refer to the economy as a whole or a component of the economy, such as weak housing starts. Extended periods of sluggishness can easily lead into a recession, so a sluggish economy is often considered a leading indicator of a potentially steeper downturn.

Understanding a Sluggish Economy

When the economy is in a sluggish state, it is generally harmful for a business since consumers and other businesses are less likely to purchase its products. A sluggish economy also has a negative effect on the labor market as businesses are less willing to hire more staff in times of weak economic growth.

Financial media often use the term "sluggish economy." For example, you will often see headlines like "Economy Sluggish due to Rising Oil Prices." Although the world economies are leveraged to global commodities and finance in different ways, there have been many cases of a sluggish global economy affecting all countries and most sectors. In a sluggish global economy, many countries can still experience positive growth, but the overall slowing pace is still considered a sign of sluggishness. For example, both during and after the Great Recession, a sluggish American economy had a negative effect on the global economy. This is to be expected as the U.S. is still the world's largest economy and a vital source of trade and investment for much of the rest of the world.

Good Businesses in a Sluggish Economy

A sluggish economy can actually be ideal for certain businesses and sectors. Businesses that see demand go up in weak economic conditions include debt collection, mediation and job search services. Recession resistant sectors like healthcare also benefit as a sluggish economy keeps costs low, with more businesses and individuals competing aggressively for the spending dollars of organizations that are still flush with cash. With overall belt-tightening, there is also a consumer preference for lower cost substitutes, which plays into the hands of discount retailers like Walmart.

During a sluggish economy, investors want to focus on companies that either provide essentials or the best value for a consumer's dollar—and ideally a company that provides both. Depending on how long an economy remains sluggish, there can be several shakeouts at the higher end of the conspicuous consumption scale. This downward pressure can offer an opportunity to short some higher-end brands, but a sluggish economy alone should not be the sole trade trigger. Many high-end brands have a global strategy that helps offset periods of sluggishness in any one market.