Recession and the business cycle for investors 2008 PLR Article

Recession and the business cycle for investors When the economy heads into a downward spiral, investors often get nervous, especially if you’re not the one handling your own portfolio. News of foreclosures, lost jobs, and less GDP output can make the road to investing scary. All of these indicators are part of a larger picture determining the strength of the economy and whether or not we are in a period of recession or expansion. It’s important to know that recession is simply a part of the business cycle. Just like the ocean, the economic tides turn and recede. Understanding the Business Cycle Peaks – A peak usually happens right before the beginning of a recession. This is when certain industries are booming and the nation’s supply of cash is at a surplus. Consumers are spending, and life is good. Remember the dot-com boom? And the real estate boom? This is where a peak is evident. However, many industries that never make it into the news do just fine during a recession. In this peak period, prices tend to increase due to inflation – but we can all afford it. Recession - After experiencing a great deal of growth and success, income and employment begin to decline. Again, this is natural - as our wages and the prices of goods in the economy are inflexible to change, prices don’t go down. They usually remain near the same level as that found in the peak period unless the recession is prolonged. The result of these factors is negative growth in the economy – less profit, and less spending – but it’s important to note that profit is lessened, not obliterated by slow economic times. Trough - Also sometimes referred to as a depression if it lasts a period of years. This happens rarely, but it does happen. This is when the recession bottoms out and stays at the bottom, experiencing no growth or recovery. Output and employment bottom out and remain in waiting for the next phase of the cycle to begin. Expansion/Recovery - In a recovery the economy is growing again and specific industries are taking the lead. Employment rises, income rises, and profits rise. The economy as a whole experiences growth and the economic forecasts are positive. The economy grows and then slows, often like the successes and failures in life. Typically, a recession period in the US doesn’t last longer than a period of a year or two, however, during the Great Depression, the economy remained at a standstill point for many years. It’s important to note that economic progress and industrial diversity make a depression highly unlikely. Our country has so many industries available to invest in and take the reins of progress that economic decline in one or two industries will not bring all industry to a crushing halt. Many investors, however, recommend investing in the “sin industry” during rough economic times, when Americans tend to give into their vices, such as the sex industry, tobacco, and alcohol.