By JUDD MATSUNAGA, Esq.
For many Rafu Shimpo readers, their minds “shut off” when the business news comes on, e.g., “interest rate hikes,” “jobless claims on the rise,” “Federal Reserve meetings,” “consumer needs changing,” etc. etc. However, understanding the different phases of a business cycle can help us make important life decisions.
Think of business cycles like the tides to an ocean: a natural, never-ending ebb and flow from high tide to low tide. And the same way the waves can suddenly seem to surge even when the tide’s going out or seem low when the tide’s coming in, there can be interim, contrarian bumps — either up or down — in the midst of particular phase.
All business cycles are “book-ended” by a sustained period of economic growth, followed by a sustained period of economic decline. Throughout its life, a business cycle, also referred to as a economic cycle, goes through four identifiable stages, known as phases: expansion, peak, contraction, and trough.
(1) Expansion: In the expansionary phase, the economy experiences growth over two or more consecutive quarters. Expansion, considered the most desirable state of the economy, is an “up” period. During an expansion, businesses and companies are steadily growing their production and profits, unemployment remains low, and the stock market is performing well.
Typically, interest rates are lower, employment rates are rising, and consumer confidence strengthens. Expansion refers to the increase in economic factors such as income, supply and demand. During this stage, there is an increase in consumer confidence. As a result, people spend more money and pay their debts more comfortably. Many companies grow and thrive in this stage.
(2) Peak: The peak phase occurs when the economy has reached its maximum productive output, signaling the end of the expansion. The peak phase follows the expansion in a business cycle. The peak of the business cycle is the instance right before key economic indicators start to fall.
The peak marks the climax of all this feverish activity. It occurs when the expansion has reached its end and indicates that production and prices have reached their limit. At this time, prices are at their highest, and the economy can “overheat,” meaning businesses can no longer satisfy consumer demands.
This is the turning point: With no room for growth left, there’s nowhere to go but down. Once these numbers start to increase outside of their traditional bands, though, then the economy is considered to be growing out of control. Companies may be expanding recklessly. Investors are overconfident, buying up assets and significantly increasing their prices. Everything is starting to cost too much. A contraction is forthcoming.
(3) Contraction: The contraction phase follows the peak stage. A contraction spans the length of time from the peak to the trough. It’s the period when economic activity is on the way down. During a contraction, unemployment numbers typically spike, stocks enter a bear market, and GDP growth is below 2%, indicating that businesses have cut back their activities.
After this point, once employment numbers and housing starts begin to decline, a contractionary phase begins. The business cycle’s contraction stage results from businesses decreasing and regulating from the previous peak. During this stage, business owners focus on finding ways to improve their financial situation, such as how they can save money or become more competitive.
(4) Trough: As the peak is the cycle’s high point, the trough is its low point. It occurs when the recession, or contraction phase, bottoms out and starts to rebound into an expansion phase — and the business cycle starts all over again. The rebound is not always quick, nor is it a straight line, along the way towards full economic recovery.
The lowest point on the business cycle is a trough, which is characterized by higher unemployment, lower availability of credit, and falling prices. The trough phase follows the contraction phase and ends before another expansion phase. During this stage, supply and demand decline significantly, and employees do not have nearly as many materials. It’s common for companies to lay off employees or close in the trough phase.
Governments and major financial institutions use various means to try to manage the course and effects of economic cycles. To attempt to end a recession, the government can employ expansionary fiscal policy, which involves rapid deficit spending. Conversely, it can try to use contractionary fiscal policy to stop the economy from overheating during expansions, by taxing and running a budget surplus to reduce aggregate spending.
Central banks try to use monetary policy to help manage and control the economic cycle by raising interest rates and slowing the flow of credit into the economy to reduce inflationary pressures and the need for a market correction. When the cycle hits the downturn, a central bank can lower interest rates or implement expansionary monetary policy to boost spending and investment. During expansion, it can employ contractionary monetary policy.
According to Investopedia.com, the popular sentiment of financial analysts and many economists is that recessions are the inevitable result of the business cycle in a capitalist economy. The empirical evidence, at least on the surface, appears to strongly back up this theory. Recessions seem to occur every decade or so in modern economies and, more specifically, they seem to regularly follow periods of strong growth. This pattern recurs with striking consistency.
Why? Although they won’t teach this in any business school – it’s done by design by the top 1%. They control the FED, they put elected officials into office, they are the “tail that wags the dog.” Every time there is a “market correction,” the wealth gap between the top 1% and the 99% gets larger. Every time the stock market crashes, or the real estate market collapses, the rich get richer.
Here’s the scary part – the last recession, called the Great Recession, occurred between 2007 and 2009. At the time, the International Monetary Fund (IMF) concluded that it was the most severe economic and financial meltdown since the Great Depression. That was 12 years ago. That means we’re due for another market collapse. It’s coming – it comes with “striking consistency.”
In fact, the very same things we were hearing right before the Great Recession in 2007, we are hearing now. Turn on your news. Stock market at record highs. Interest rates at record lows. Banks making “easy-qualifying” or “no-qualifying” loans to artificially keep the real estate market from crashing too soon.
What does it mean? If you’re thinking of pulling money out of your home, do it now while interest rates are still at near historic lows. If you’re thinking of selling your home, do it now before the market crashes. If you’re thinking of buying a home (or investment property), you may want to wait for the market to crash. If you are heavily invested in the stock market, you may want to diversify into some safer growth-oriented investment vehicles.
Judd Matsunaga, Esq., is the founding partner of the Law Offices of Matsunaga & Associates, specializing in estate/Medi-Cal planning, probate, personal injury and real estate law. With offices in Torrance, Hollywood, Sherman Oaks, Pasadena and Fountain Valley, he can be reached at (800) 411-0546. Opinions expressed in this column are not necessarily those of The Rafu Shimpo.