The business cycle is the term used
to describe the expanding and contracting
pattern of the US economy.
Up until the 1800s, it was thought
that only external forces like wars and plagues
were responsible for economic swings.
But in 1819, a French economist named
Jean Sismondi proposed the idea that economies
go in cycles based on production and consumption.
Here is how it works.
When business activity picks up, gross domestic product, or GDP,
tends to rise, and the economy expands.
At some point, this expansion reaches a peak
and people become less willing to spend,
which may lead to a surplus of goods and services.
When production consistently exceeds consumption,
a downward contraction begins.
The business cycle may then enter into a recession,
or in the worst cases, a depression.
This low point is known as a trough.
At this point, economists disagree
on the best course of action--
whether government should intervene,
as in the bailout measures of 2008, or if the economy
should just be left to right itself.
The turning point occurs when the balance between production
and consumption is reached.
And then the upward cycle begins again.
How long does the process take?
In the 12 cycles since World War II,
the average period of time from peak to peak
has been 68.5 months, or just under six years.
Though economists agree on the phases of the business cycle,
even the smartest ones disagree on how
to interpret the many economic indicators that
determine its highs and lows.
That is why it is critical to have a long-term investment
strategy.
How will you weather the ups and downs of the business cycle?
Give us a call, and let's talk about it.