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The Business Cycle

The Business Cycle. Sec. 2 (Read all of Sec. 2). A modern industrial economy repeatedly goes thru good times, then bad, then good…. it goes thru cycles. Why is it important to understand the nature of business cycles?. The business cycle directly impacts our daily lives

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The Business Cycle

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  1. The Business Cycle Sec. 2 (Read all of Sec. 2)

  2. A modern industrial economy repeatedly goes thru good times, then bad, then good…. it goes thru cycles

  3. Why is it important to understand the nature of business cycles? • The business cycle directly impacts our daily lives 2. We continually are faced with decisions that can enable us to take advantage of “good” times… and lessen the hurt of the “bad” times

  4. 4 Phases • A high point is called a “peak” • This is a period of prosperity • Typical characteristics: • MANY NEW BUSINESSES OPENED • STRONG EMPLOYMENT • FACTORIES WORKING AT OR NEAR FULL CAPACITY • CONSUMER SPENDING IS STRONG

  5. From a peak, GDP growth slows and begins to decline… contraction occurs: business activity slows Unemployment rises Factories work at less than full capacity Consumer spending weakens

  6. Important point ! • If a contraction lasts at least 2 quarters (6 months), we are said to be in a “recession” • A prolonged recession or one that is particularly severe is called a“depression”

  7. Typical symptoms of a recession: • factories reduce production and lay off workers • Consumers reduce purchases • More consumers & biz are late on loan payments…loan defaults rise • Fewer new businesses open, many established ones fail • Home foreclosures may rise

  8. At some point, the downward trend of the cycle levels off… The lowest point is called the trough

  9. From the trough… • biz cycle enters the recovery and expansion phase (GDP grows) where it will eventually reach another peak And the cycle continues…

  10. The Typical Course of Business Cycles Peak AND THE CYCLE CONTINUES… Recovery & Expansion Level of National Business Activity Peak Contraction Trough Time Figure 7-8

  11. What Keeps a particular phase of the Biz Cycle Going? 4 Main Variables:

  12. 1. Business investment When the economy is expanding, firms expect sales & profits to keep rising. Therefore, they are more willing and likely to invest in new equipment, plants, labor investment tends to create jobs and increase output, helping to perpetuate the economic expansion

  13. 2. Interest Rates & Credit • low interest rates = increased borrowing & buying on credit (individuals & firms) • Stronger demand for goods/services motivates firms to hire more people to increase output • Int. rates today: high or low?

  14. 3. Consumer expectations • Optimism/confidence = strong consumer spending (opposite is true, too…weakening confidence means weakening spending by consumers)

  15. 4. External Shocks • Repercussions from an outside event (a war, natural disaster, etc.) • Of all the factors that affect the biz cycle, this is most difficult to predict • Could be a positive shock (eg, discovery of huge oil deposit)

  16. Forecasting Biz Cycles • Economic Indicators: Economists study data that is compiled on a regular basis to see future trends. A few of them: 1. # of building permits issued 2. stock market’s performance 3. interest rates…headed up or down? 4. new orders for manufactured goods (like cars, stoves, patio furniture, etc.

  17. Some Notable Cycles in U.S. History • Great Depression (1929-1940) • 1946 Post-War Recession (returning GIs) • 1973 Recession (external shock) • 1990s Expansion (dot.com bubble) • 2007 Recession (housing collapse)

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