2 UNDERSTANDING THE BUSINESS CYCLES
There are certain times when the release of certain economic indicators is awaited withgreat anticipation. However, those same indicators barely get noticed at some other conditions. Why do these economic measures jump in and out of the limelight? Theanswer is that much depends on where the US economy stands in the business cycle.
During a recession, when there are lots of unemployed workers and idle manufacturingcapacity, inflation was less of a concern. Thus, measures such as the consumer priceindex, which gauges inflation and the retail level, do not have the same impact on thefinancial markets as they would if the economy were operating at full speed. Duringrecessionary periods, indicators that grab the headlines are housing starts, automobilesales, and the major stock indices because they often provide the earliest clues that aneconomic recovery is imminent. Once business activities is in full swing, inflationmeasures like the CPI take centre stage again while other indicators receive a bit to thebackground.The business cycle itself has 5 phases. The first phase refers to the highest point of outputthe economy achieves just before it gets into trouble and turns down. After this peakcomes phase two, which is the recession itself, at this stage the economy actually shrinks.It saps the confidence of households and causes financial distress for business. The thirdphase is reached when the economy actually reaches bottom, a point known as therecession trough. The fourth phase occurs after the economy actually stops shrinking andresumes its growth path. Finally, when the level of economic activity pushes past theprevious high point, the business cycle marks the fifth and last phase, often referred to asexpansion.