Jim Kopas

Last weeks entry “The Recession is Over- Stronger than Expected Recovery Underway” sparked quite a controversy among readers.  I received numerous comments that disagreed with my positive economic outlook and some even called to question my sanity.  Initially, I was surprised by the negative reactions, so I tried to understand the economy from their perspective.  What I found was that the majority of people do not “feel” that the economy is improving.  In fact, the average American is concerned with unemployment, housing and government expenditures and this leads them to believe this “Great Recession” is far from over.

I will take this opportunity to educate the readers on the Business Cycle as I believe many of you simply do not know the characteristics of the stages. With this knowledge you will have a better understanding of the economy and where it is headed.    

So what is the Business Cycle?

The business cycle is the consistent fluctuations in the level of economic activity between growth and contraction. The typical business cycle lasts for approximately 4-5 years from peak to peak.  Essentially the business cycle is a reflection of market psychology the alternation between caution, optimism, greed, and fear.  With this in mind, there is no reason for the business cycle to not continue in the future unless there is a substantial change in human nature.                

What are the stages of the Business Cycle?

1. Early Expansion

In this initial phase of the business cycle the production of goods and services start to increase rapidly.  To further improve consumer confidence, interest rates are at low levels; in addition inflation rates are low and sometimes negative.

2. Late Expansion

As consumers finally begin to feel optimistic, the demand for goods and supplies increases dramatically.  Interest rates also rise as consumers are more willing to borrow in order to purchase more goods.

3. Peak

When the economy reaches the peak, the economic growth rate begins to slow down.  Consumers become greedy as they are now accustomed to the prosperous growth over the last expansion.

4. Early Contraction 

Consumers begin to see the effects of the decrease in the economic growth rate.  Consumer demand, corporate production, and employment rates all begin to decline. The economy is on its way towards a likely recession.

5. Late Contraction

The economic growth rate continues to contract at a faster rate.  Once again consumer demand, corporate production, and employment fall as the recession is in full force.  Consumers are now finally cautious about the future expectations of the economy.  

6. Recovery

This is the final phase of the business cycle and the phase we are currently in today.  The economy bottoms out and begins the healing process.  Fear is rampant as consumers have cut back on all unneeded expenditures.  Interest rates and mortgage rates have dropped substantially in order to restore consumer confidence. Unemployment peaks at the end of the recovery stage. 

The current economy is by no means in unchartered territory.  As noted above the economic environment today fits directly into the recovery stage of the idealized business cycle.  Currently, we are at the culmination of the prior business cycle and on the verge of starting a new cycle.

Next week I will explain: leading, coincident, and lagging indicators and why people are not “feeling” the improving economy.  As always, please feel free to voice your opinions in the comments section below. I hope you all have a Happy Halloween! -Jim

Jim Kopas Economy