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WHAT IS THE BUSINESS CYCLE?

Business Cycle Income Profit Loss Recession Concept

To people of faith, hearing that the economy moves in cycles may sound very similar to one of our favorite passages in Ecclesiastes.

“For everything there is a season, and a time for every matter under heaven: a time to be born, and a time to die; a time to plant, and a time to pluck up what is planted; a time to kill, and a time to heal; a time to break down, and a time to build up; a time to weep, and a time to laugh; a time to mourn, and a time to dance; a time to throw away stones, and a time to gather stones together; a time to embrace, and a time to refrain from embracing; a time to seek, and a time to lose; a time to keep, and a time to throw away; a time to tear, and a time to sew; a time to keep silence, and a time to speak; a time to love, and a time to hate; a time for war, and a time for peace.”

Moving in Cycles

The business cycle is the natural rise and fall of economic activity over time. The business cycle, sometimes called the economic cycle, has four phases: expansion, peak, contraction, and trough.

During an expansion phase, economic activity picks up. Businesses look to receive more funding so they can increase production to meet demand. They tend to add more employees, which creates consumers with more money to spend. Since World War II, the average expansion has lasted 65 months.1

When the expansion begins to slow, the economy reaches a peak, which can last a few weeks or several months.

Eventually, the economy enters a period of contraction. Businesses prepare for less demand by reducing production, which can lead to people having less money to spend. Since World War II, the average contraction has lasted about 11 months.1

As the contraction slows, the economy enters the fourth phase of the business cycle, known as the trough. Then, as the economy stabilizes, it eventually moves into an expansion phase and the cycle starts again.

Source: Internal Revenue Service, 2023

Listed above is a graph showing the business cycle.  

Where are we now?

It appears the economy is navigating through the trough phase of the current business cycle. However, there are many mixed signals, which is why some believe the economy may be headed for a “soft landing,” while others believe the trough will end with a recession.

In a soft landing, economic growth would slow enough to bring down inflation while preventing the United States from entering a recession. The Federal Reserve has raised interest rates steadily since early 2022 to slow economic growth, which in turn is beginning to slow the rate of inflation.

But raise interest rates too much, and the Fed risks pushing the economy into a recession, which is considered a significant decline in economic activity that lasts more than a few months. Central banks only have so many tools at their command, so engineering a soft landing can be a challenge in a $23 trillion economy.2,3

We study the business cycle because new investment opportunities can present themselves as the economy moves through various phases. We’re confident that the economy will enter an expansion phase, and when it does, we will be looking for ways to take advantage of the cycle.

  1. Congressional Research Service, January 3, 2023
  2. NBER.org, 2023
  3. Forbes.com, December 6, 2022

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