December 4, 2023
We’re cycling along.
It’s easy to forget that economic activity tends to move in cycles. A full cycle, known as the business cycle, typically includes four stages:
Contraction occurs when economic growth slows as an economy produces fewer goods and services. Economic contractions often include recessions. As productivity contracts, it can negatively affect the profitability of companies, as well as the number of jobs available and the income security of workers. The United States economy contracted during the first two quarters of 2022.
Trough is the stage at which economic growth hits bottom for the cycle. It occurs before an expansion begins. The month following a trough is the first month of an expansion.
Expansion occurs when an economy produces more goods and services. The United States economy has been expanding since mid-year 2022. Productivity, as measured by gross domestic product, grew 5.2 percent year-over-year in the third quarter of this year.
Peak is the stage at which economic growth reaches its highest point for the cycle, just before a contraction begins. The month following a peak is the first month of a contraction.
“It might be tempting to think the stages of the business cycle are like the cycles on your dishwasher – regular cycles that occur in predictable patterns: The rinse cycle always begins after the wash cycle has completed, and each rinse always lasts the same length of time…But there is nothing ‘regular’ about the business cycle,” wrote Scott A. Wolla in the St. Louis Federal Reserve’s Page One Economics® blog.
At the start of the fourth quarter, the United States was in the late cycle stage of expansion, according to Fidelity Insights. That doesn’t necessarily mean we’re heading into a contraction, though. Expansions usually end when the economy experiences a shock of some kind, reported Wolla.
“Economists suggest that shocks that cause recessions might include financial market disruptions, international disturbances, technology shocks, energy price shocks, and actions taken by monetary policymakers to restrain inflation.”
Major U.S. stock indices finished last week higher, reported Barron’s, and U.S. Treasury yields moved lower as investors embraced the idea that rate cuts may be ahead in 2024.
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