👨🎓 The economic cycle - booms and busts
**4/52** Macro Mornings Education
New here? This is part of a 52-week series on macroeconomics designed to build your knowledge step by step. Feel free to catch up on previous emails here if you'd like to start from the beginning!
Dear all,
Let’s talk about something that’s fundamental to understanding the economy - the economic cycle.
The economic cycle is the natural fluctuation of the economy between periods of expansion (booms) and contraction (busts).
These cycles are inevitable, and recognizing where we are in the cycle can help you make better financial decisions.
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The cycle has four main phases:
Expansion: This is when the economy is growing. GDP increases, unemployment falls, and businesses and consumers are confident. During expansions, you might notice that job opportunities are plentiful, wages are rising, and the stock market is generally doing well. For example, the period from 2009 to 2020 saw a significant expansion in the U.S. economy.
Peak: The peak is the height of economic growth, where the economy is operating at full capacity. However, at this stage, inflation might start to rise as demand outstrips supply, and central banks might raise interest rates to cool down the economy.
Contraction: Also known as a recession, this phase occurs when economic activity slows down. GDP declines, unemployment rises, and consumer confidence drops. For example, the global financial crisis of 2008 led to a significant contraction in economies worldwide. During a contraction, people may lose their jobs, and businesses may close or reduce their operations.
Trough: The trough is the lowest point of the cycle, where the economy bottoms out before starting to recover. Central banks might lower interest rates to stimulate growth, and governments might increase spending to boost the economy.
Understanding the economic cycle helps you anticipate changes and adjust your financial strategies accordingly. , during a boom, you might invest more aggressively in stocks, while during a contraction, you might shift to safer assets like bonds.
In our next email, we’ll explore how economic growth is measured and what it means for your financial decisions.
Alessandro
Founder of Macro Mornings
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