The U.S. has experienced several business cycles in its history. A business cycle is defined as the period of rising and falling economic growth. This is typically defined by GDP growth rates over a certain period of time.
Business cycles are caused by shifts in the investment environment. When investments are risky, people invest less and pull money out of the market. This lowers production and growth, which leads to a recession.
When investments are safe, people invest more and pull money out of the market, which increases production and growth, leading to a boom. These booms and busts can last for varying periods of time, from a few months to several years.
Historically, business cycles have occurred against a backdrop of a long-run trend of economic growth. Even during the most severe recessions, the economy has still grown slightly over a few years (CNN Money).
Economic recessions
The US has experienced several business cycles in its history, and we’re currently in a period of moderate growth. However, this period of growth is the result of past economic recessions and booms.
Business cycles have occurred against a backdrop of a long-run trend of economic growth. As mentioned before, GDP has increased over time due to improvements in technology and productivity.
This is evidenced by the fact that inflation has decreased over time, because more goods and services are available at cheaper prices.
Furthermore, wages have increased over time, meaning people are earning more overall despite price fluctuations. The average American was living approximately at the poverty line in the 1950s, but can afford many more things now due to economic growth.
Economic crises like the 2008 recession can be scary for individuals and nations, but they prove how unstable things can be and how important stability is.
What causes economic recessions?
Recessions are the result of economic shifts, usually in the business sector. A recession is a period of time when economic activity, such as income and employment, decreases.
Changes in the business sector, such as technology changes or demand changes, can cause recessions. As companies adopt new technology or face a reduction in demand, they must lay off workers and cut salaries. This in turn reduces consumer spending and economic activity.
Economists can’t exactly pinpoint when a recession will occur but they have indicators that reveal when there is an impending decline in the economy. These indicators include the unemployment rate, income growth, productivity growth, and inflation. If any of these indicators show a decline then there may be a recession coming.
Demand-side theories
A second major group of theories focuses not on the supply of goods and services but on demand for them. These theories argue that business cycles are driven by shifts in demand rather than by shifts in supply.
Demand-side theories can be either positive or normative. A positive theory explains what happens in the economy, while a normative theory suggests what should happen in the economy.
Positive demand-side theories can be broken down into two subgroups: classical theory and Keynesian theory.
In classical theory, the economy moves in a continuous circular motion, moving from production to consumption and then back to production again. Any external shocks that affect production are absorbed by savings and then re-invested in new production, keeping the cycle moving.
In Keynesian theory, the basic idea is that there is a circular motion, but external shocks can break this motion up. When this happens, the government should step in and restore growth through policy measures.
Supply-side theories
A separate group of theories focuses on the role of supply in business cycles. These theories focus more directly on the role of production in the economy.
Supply-side theories see the economy as being made up of two parts: the supply side of the economy and the demand side of the economy.
The supply side is made up of producers: firms that make goods and services to sell to consumers. The demand side is made up of consumers, who buy goods and services.
Changes in producer costs, such as wages paid to workers, affect production. If wage costs go up, for example, it will cost firms more to produce each unit of a good or service. That will cause either prices to go up or quantity produced to go down, depending on how firms respond.
Demand-side theories see consumption as being what drives the economy. When consumers spend money, it stimulates the economy by increasing output and employment.
What are the effects of a recession?
During a recession, both jobs and income are reduced. As a result, demand for most goods and services falls, which leads to job cuts and fewer hours worked.
Furthermore, those who still have jobs see their wages reduced. That’s because employers try to maintain profitability even as demand falls by reducing the cost of their products and services.
A recession is an important time for businesses and individuals to evaluate their strategies and practices. For businesses, this evaluation should include whether their strategies are in line with the current demands of customers.
For individuals, this evaluation should include whether they are being paid enough to save for the future – such as for retirement – or whether they should be spending less in order to balance out savings.
How can I protect my money from a recession?
The best way to protect your money in a recession is to have a well-balanced portfolio with various assets that track different indices.
For example, have some exposure to stocks, bonds, and gold as these represent different asset classes. By having a variety of assets, you reduce the risk that your entire portfolio will collapse due to the failure of one asset class.
Historically, stocks have performed well even in times of recession. While there may be some stock market dips, your overall wealth will grow over time despite the economy.
The same can be said for gold: it tends to keep rising in value even during recessions, making it a good addition to your portfolio.
Banking institutions tend to suffer in recessions as their loans become less profitable. You can save some money by looking into banking alternatives such as credit unions.
