THE NATURE OF THE ECONOMIC CYCLE Economists break down the economic cycle into four phases: 1) expansion, 2) peak, 3) contraction, and 4) trough. An expansion is typically characterized by month-over-month economic growth (with adjustments necessary sometimes to account for seasonality) until such growth peaks and activity begins to contract. After the contraction concludes, expansion begins anew. Such activity typically occurs on a secular growth trajectory with each successive contraction bottoming at a higher level than the prior cycle, as depicted in Figure 3. Figure 3. The typical business cycle pattern.
Growth Trend Line
Prosperity/Late Expansion
ve Posi Gap u p t Out
Early Contrac on
Peak
a ve Neg t Gap pu Out Recession/Late Contrac on
Recovery/Early Expansion
Trough
Source: Balentine
This oversimplification conveys a high-level understanding of an economy’s current positioning, which will suffice for standard inquiries on questions such as, “How is the economy?” Of course, the economic cycle is far more complex, advancing in fits and starts rather than via a smooth cadence of progress. In fact, while the term “cycle” implies phases occur at predictable intervals, the opposite is actually the case; economic cycles are irregular in both duration and magnitude. Put differently, within a cyclical expansion phase, there will often be episodes of expansion, stagnation,
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