The business cycle is the term used to describe the expanding and contracting pattern of the U.S. economy. Up until the 1800s, it was thought that only external forces, like wars and plagues, were responsible for economic swings. But in 1819, a French economist, named Jean Sismondi proposed the idea that economies go in cycles based on production and consumption. Here’s how it works.

When business activity picks up, gross domestic product, or GDP, tends to rise and the economy expands. At some point, this expansion reaches a peak, and people become less willing to spend, which may lead to a surplus of goods and services. When production consistently exceeds consumption, a downward contraction begins. The business cycle may then enter into a recession, or in the worst cases, a depression. This low point is known as a trough.

At this point, economists disagree on the best course of action, whether the government should intervene as in the bail-out measures of 2008, or if the economy should just be left to right itself. The turning point occurs when the balance between production and consumption is reached, and then the upward cycle begins again.

How long does the process take? In the eleven cycles since World War II, the average period of time from peak to the peak has been 68.5 months or just under six years. Though economists agree on the phases of the business cycle, even the smartest ones disagree on how to interpret the many economic indicators that determine its highs and lows. That is why it is critical to have a long-term investment strategy.

How will you weather the ups and downs of the business cycle? Give us a call and let’s talk about it.