Business Cycle

Why is the business cycle like a roller coaster?

The business cycle is typically not concerned with the cycles of a single company, but rather with broader macroeconomic patterns and it usually follows a fairly regular set of phases, as measured by real gross domestic product (GDP) or GDP adjusted for inflation. A business cycle aims to keep track of the state of the economy. In practical terms, the business cycle follows the condition of an economy from one of growth to one of contraction and recession, and back again. It may have an impact on how you spend your money, how you invest, and how you get credit. Consider consulting with a financial adviser if you need assistance figuring out how to make the most of the economic cycle to optimise your assets.

What does business cycles meaning?

The Business Cycle is defined as the fluctuation of economic activity over some time. Those changes are unpredictable, and they have an impact on the functioning of governments, families, companies, and even nongovernmental groups.

The business cycle was characterised in the decades after World War II by increasing consumer activity, population expansion, and the arrival of the suburbs in the United States. Mortgages, loans, and credit cards propelled the economy forward in the 1970s. Mortgage debt and technology speculation have fuelled the economic cycle in recent years.

  • The National Bureau of Economic Research (NBER) now tracks the economic cycle via quarterly GDP growth, which is calculated by the NBER. The National Bureau of Economic Research uses data on employment, personal income, manufacturing, and retail sales to identify the phases of the economic cycle.
  • Meanwhile, fiscal policy is used by the government to prevent the economy from overheating or wilting in either direction. Politicians, however, are often deterred from increasing taxes or eliminating programmes that might help to cool an overheating economy by popular pressure. They would very certainly be voted out of their position if they did so.
  • A second way in which the Federal Reserve has an impact on the economic cycle is by reducing interest rates when the economy is in recession. It also increases interest rates to slow the pace of growth.
  • The Federal Reserve’s balancing act aims to generate adequate employment for all employees while also preventing the occurrence of inflation.

Stages of the Business Cycle:

Both supply and demand must be active for the economic cycle to continue. In addition, it requires readily accessible money and customer trust. The following phases of the cycle occur as a result of the fluctuation of those elements:

1. Expansion:

One of the initial steps involves a fast increase in the number of people employed, as well as in salaries and profits. In turn, this has the potential to enhance demand, supply, and services. The beginning of the boom is marked by the expansion of the economy.

The ability to generate more money leads to a lower level of debt that is paid on time. It also has the additional benefit of increasing both investments and income.

2. Peak:

When a business cycle reaches its peak and achieves maximum growth, it is said to have reached its peak. Costs and income are at their greatest levels, and the economy is adjusting to the collapse of the stock market.

Like a roller coaster, the economic cycle would be at the peak of its ascent and just before it begins it’s down. The economy will turn around, and your income potential will most likely remain stagnant for the foreseeable future.

3. Recession:

Even when the demand for goods and services decreases, the supply of goods and services continues to lag. Occasionally, this results in a surplus, which may lead to price reductions to sell goods more quickly. Unemployment is usually on the increase, while income remains constant or even declines in certain cases.

4. Depression:

When unemployment rises and economic development slows, a recession becomes a depression, which lasts for many months. The number of bankruptcies is increasing, while trade is decreasing. Consumers’ trust in the economy is eroding, which is causing investment to stall.

5. Trough:

The trough is the point at which a depression comes to an end. While unemployment rates have stopped falling, the gap between supply and demand has reached its lowest point. It’s the polar opposite of the word peak.

6. Recovering:

After hitting rock bottom, there is only one way to go: up. Recovery is defined as a turnaround after a period of negative growth. Demand is increasing, although at a slower rate than it did before the expansion and at peak periods.

Production begins to rise, which results in an increase in hiring and a decrease in unemployment. As more customers gain confidence in the market, the number of investments is increasing. The business cycle is complete after the economy has returned to stable growth levels.

What is the Business Cycle and How Does It Affect Your Money?

The business cycle is divided into four phases. The way you save, spend, and invest your money is influenced by the state of the economy. Stable employment with a predictable salary means that you will have more money to invest back into the economy. Increased purchasing power and investment contribute to the expansion of an economy.

In contrast, the less money you have, the less money you can afford to invest in other products and services. For example, if you lose your work, you will travel less, spend less money on dining out, and have less money in general.

It also implies that you may be unable to afford a new vehicle, a house, or other large-ticket expenditures in the future. The fewer products that a company sells, the greater the likelihood that the company will go out of business itself.

Tips for Keeping Yourself Safe during the Cycle:

The economic cycle is now in the midst of a downturn, which has been exacerbated in part by the COVID-19 epidemic. Stocks and commodities are particularly inexpensive during the trough phase. They’ll ultimately recover, which means you’ll be able to cash out and make much more money than you invested.

Prices are expected to rise throughout the growth period, so you may want to choose your assets carefully at this time. Pay careful attention to particular stocks if you want to get in on them before they reach their high point in the market. You don’t want to spend a lot of money on this.

When the market is at its most active, it’s time to sell. Your assets may be in great demand, which means you could be in line for a substantial pay-out. You may want to consider secure assets such as money market funds or accounts, government bonds and bills, as well as high-yield savings accounts and certificates of deposit (CDs).

Suggestions for Dealing with the Business Cycle:

Are you concerned about how the business cycle may affect your financial plan?

A financial adviser can help you make adjustments to your investments and stay on track with your objectives. Finding a financial adviser that is a good match for your requirements does not have to be a difficult task. Smart Asset’s free tool connects you with financial advisers in your region in less than 5 minutes, and it’s completely free.

If you’re ready to be matched with local advisers who can assist you in achieving your financial objectives, click here to get started. Consider redistributing your funds to make the most of your resources.

Different lenders and institutions should be compared to see which ones have the lowest costs and provide the greatest rate of return. The more money you can save now, the less stress you’ll have when the economy starts to tank.

Conclusion:

The bottom line is that the phases of the business cycle are as follows. Understanding a business cycle is essential not only for you as a worker, but also for you as a customer and as a shareholder in the company. You’ll be able to tell when it’s a good moment to purchase, when it’s a good time to sell, and when it’s a good time to simply sit tight.

You will also be aware of how to prepare for the worst-case scenario. Having a feeling that a recession is approaching will allow you to make adjustments to your investment portfolio. Meanwhile, if you or your adviser believes that the worst may be passed, you may increase your risk tolerance and invest more aggressively.

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