Key Takeaways
- A trough is a stage in the business cycle where economic activity and prices bottom out before beginning to rise again.
- The business cycle includes phases of expansion, peak, contraction, trough, and recovery.
- Higher unemployment, increased layoffs, declining business sales, and reduced credit availability usually mark a trough.
- Following the trough, the economy typically enters a phase of recovery and expansion.
- Accurately identifying a trough often requires hindsight.
Image depicting an economic trough
Unpacking Troughs in Economics
The business cycle operates through five distinct phases: expansion, peak, contraction, trough, and recovery. During the trough phase, the economy transitions from declining (contraction) to increasing activity (recovery). Key metrics, such as Gross Domestic Product (GDP), help economists track these phases. GDP represents the total value of all goods and services produced in a country and is one of the most significant economic indicators.
In this context, a trough signifies the lowest point in business activity before the next phase of growth or expansion. Various factors, including employment rates, business sales, and stock market performance, help to identify troughs in real-time. However, the precise identification is often easier in hindsight.
Unemployment levels serve as another important indicator. Rates below 5% typically denote full employment, indicative of economic expansion. However, consistent month-to-month increases signal contraction, while a decline in these rates often signifies a trough.
Business Cycle Indicators
- Stock Market Indices: Major indices like the Dow Jones Industrial Average (DJIA) and the S&P 500 closely follow the business cycle. A significant rally after a downtrend could signal an upcoming trough.
- Income and Wages: These rise during expansion, fall during contraction, and bottom out at the trough.
Special Considerations for Troughs
Identifying troughs in real-time is challenging. This phase of the business cycle can last for varying lengths of time. While it is happening, contraction is marked by dwindling indicators, only for expansion signs to mark the emergence from the trough.
The severity of troughs also varies. Minor troughs result in slight dips in economic growth, whereas severe troughs can stretch out during prolonged periods of economic hardship. Typical signs include plummeting business earnings, increased layoffs, lower credit availability, high unemployment, and business closures. While somber, troughs are critical to signaling a positive turning point, leading to economic recovery.
Swing Lows Vs. Troughs
In technical trading references, some traders refer to swing lows as troughs and swing highs as peaks. This analogy stems from patterns observed in asset price movements, which naturally form peaks and troughs.
Historical Examples of Economic Troughs in the U.S.
The Great Recession
An economically significant trough occurred in June 2009, marking the official end of the Great Recession that began in December 2007. U.S. GDP fell from its $14.99 trillion peak to $14.36 trillion before the trough, indicating severe economic contraction. Recovery ensued, leading the GDP to $15.02 trillion by September 2011.
Early 1990s Recession
The early 1990s recession trough occurred in March 1991, with the GDP dropping from $8.98 trillion in July 1990 to $8.87 trillion. This recession’s recovery phase led to GDP surpassing the $9 trillion mark by the end of 1991.
Frequently Asked Questions
When do troughs in the business cycle occur?
A trough marks the conclusion of a recession, transitioning into economic recovery or expansion. The trough’s depth, diffusion, and duration are measured by the magnitude, spread, and time interval of the decline in output, employment, income, and sales.
What are the stages of the economic cycle?
The economic cycle includes four stages: expansion, peak, contraction, and trough.
What are the levels of severity of an economic trough?
A recession, defined by consecutive quarterly negative GDP growth, lasts several months or longer. A depression, a more extreme form of recession, generally continues for over three years or results in a GDP decline of at least 10% in a year. High unemployment and low inflation accompany depressions, which are less frequent than milder recessions.
What is a peak vs. a trough in economics?
A peak, the high point, contrasts a trough, the low point. From a peak, the economy moves into contraction, whereas from a trough, it moves into expansion.
Related Terms: business cycle, recession, expansion, peak, GDP, unemployment rate.
