Economic Cycle

The economy goes up and down (think: 2008 crash). This is known as the economic cycle. We can think of the economic cycle as having four stages.

Starting at the top, immediately before tumbling downward with the economy falling flat on its face, we have the beginning of a recession. That means GDP goes down, interest rates are down (because the government wants people and businesses to borrow money), and consumers are singing the blues. Worry, worry, and more worry.

Once we hit the bottom of the curve, we’re in the early recovery stage. GDP goes up, consumers start to see the light, and businesses pick up the pace. Interest rates stay down, hoping that it will help boost the economy as it nurses its broken bones and wounds.

Then there’s late recovery, when people are starting to get off the high of early recovery. Interest rates go back up, businesses are stable rather than booming, and consumers sober up. It’s been a while since the economy tumbled down a staircase...too long, perhaps...

Ready for the drop again? In the early recession stage, consumers start to get worried, businesses have a tough time, and interest rates are at an all-time high. Uh-oh.

Through this up-and-down cycle, the economy expands and contracts over and over again. There are many economic theories and opinions as to why this happens, and what to do about it. If you have a lot of money in the stock market...keep an eye on it.