A Comprehensive Guide to Understanding and Leveraging Economic Cycles
There are four basic cycles to the economy: 1) Expansion, 2) Peak, 3) Contraction, and 4) Trough. Or another way to think about the cycles: 1) Expansion, 2) Boom, 3) Recession, 4) Depression.
A 17 Minute Read
Economic Cycles vs. Personal Perceptions
A good portion of my life I’ve understood time from the perspective of an academic calendar. The “beginning” of the year for me has always been late August, prepping for new classes that started in the last week of the month. Mid-December to Mid-January were the quiet dark months of winter. Spring began January 15 with a new round of course loads. May was the end of the year.
Real estate is the exact opposite. Spring begins in spring and is the typical peak buying and selling season. Home sales begin to decline or plateau from July to September. Come October homes typically sit on the market forever, and January and March buyers begin searching for after-holiday deals. Other weird things affect the real estate market—presidential elections are a prime example. A lot of people are saying they want to wait to put their home on the market until after the elections because what if a Democrat gets in office? Or, on the other side of the aisle, what if a Republican gets in office? What if we vote in a woman!? What if we vote in Trump!? Depending upon your perspective, it could be the end of the world.
Except, it’s not ever the end of the world. Although they may wait longer than usual, people still end up buying and selling houses because, well, they need to.
The beginning of the fall semester students, teachers, and professors are all super excited to get the year started—that time of the year is full of potentiality. Everyone is in a good mood. By the time January rolls around, we have gone through final exams and are exhausted. In fact, January is so mentally exhausting for those in academia that Dover, New Hampshire’s high school (Go Green Wave!) instituted a “Reset Day” in 2024, the program so successful teachers jumped ship from other schools to teach in our district because of the initiative. And spring semester is the light at the end of the tunnel.
The sensed uncertainty with presidential elections affecting the overall real estate market, and the emotional roller coaster of the academic year is really just all about how we personally and collectively perceive the world around us. Spring semester is not much different than fall semester. A democratic president versus a republican president still ticks off about half the country.
The point is, there’s always a season.
To every thing there is a season, and a time to every purpose under the heaven:
A time to be born, and a time to die; a time to plant, and a time to pluck up that which is planted;
A time to kill, and a time to heal; a time to break down, and a time to build up;
A time to weep, and a time to laugh; a time to mourn, and a time to dance;
A time to cast away stones, and a time to gather stones together; a time to embrace, and a time to refrain from embracing;
A time to get, and a time to lose; a time to keep, and a time to cast away;
A time to rend, and a time to sew; a time to keep silence, and a time to speak;
A time to love, and a time to hate; a time of war, and a time of peace. ~ Ecclesiastes 3-1:8
The Four Cycles
The Expanison
In an economic expansion, the economy grows and thrives. This phase is characterized by increasing consumer confidence, rising employment, and growing GDP. Businesses invest more in production, wages increase, and consumer spending rises. For example, the U.S. economy saw a significant expansion after the 2008 recession, driven by low interest rates, government stimulus programs, and a surge in technology and housing markets. During the expansion period, unemployment dropped from 10% in 2009 to 3.5% by the end of 2019, while consumer spending and stock market values soared. The expansion phase often brings a sense of optimism and encourages both individual and corporate investments in real estate, stocks, and other financial ventures.
The Peak
The economic peak is the height of an economic cycle, where growth hits its maximum potential before slowing down. It’s the moment when optimism can lead to excesses—businesses overproduce, stock prices are inflated, and credit is extended too freely. The dot-com boom of the late 1990s is a classic example of an economic peak. During this time, the stock market reached unprecedented highs, largely driven by speculative investments in internet-related companies. This period was marked by euphoria, with investors believing that the upward trend could continue indefinitely. However, peaks are often precarious because what follows is typically a sharp correction or contraction, as occurred when the dot-com bubble burst in 2000, causing a market crash and leading to a recession. In my opinion, we might actually be seeing a peak right now in the tech sector in relation to Artificial Intelligence.
The Contraction
In an economic contraction, the economy slows down, often after hitting a peak. During a contraction, businesses cut back on production, unemployment rises, consumer confidence weakens, and stock markets typically decline. The 2008 financial crisis is a vivid example of an economic contraction. Triggered by the collapse of Lehman Brothers and the subprime mortgage crisis, banks faced liquidity issues, and housing markets crumbled. Millions of people lost their homes to foreclosure, unemployment soared, and GDP contracted sharply. This phase can cause a ripple effect across industries as companies tighten their belts, lay off workers, and reduce investments.
The Trough
The economic trough marks the lowest point of an economic cycle, where the economy bottoms out after a contraction or recession. At this stage, unemployment is at its highest, consumer spending is at its lowest, and businesses are reluctant to invest. However, the trough also sets the stage for recovery. A key example is the Great Depression of the 1930s. By 1933, the U.S. economy had hit its deepest trough, with unemployment rates reaching 25%. Industrial production had fallen by half, and widespread poverty affected most of the population. Yet, policies like the New Deal, along with other global economic adjustments, helped pull the U.S. out of the Depression, and the recovery phase eventually began. The trough is often where new growth emerges, as economic conditions improve, and businesses begin hiring again.
Where We Are In The Economic Cycle Today
As of this draft, which was written way back at the beginning of September 2024, no. But a lot of economists seem rather confused. A lot of articles online are asking if we are in a recession. Some of that might be clickbait headline writing.
The National Bureau of Economic Research (NBER) which are considered the official recession scorekeepers declared a recession way back in 2020, and before that they yelled recession in 2007-2009. The NBER labels all parts of the U.S. economic cycle through time: the expansion, the peak, the contraction, and the trough. By the time NBER does declare an official expansion or contraction, we’ve already been in that particular cycle for a at least a few months because the data they collect is from the recent past.
Timing the Market
So when’s the next recession? The next expansion? How can you “time” the market? Well, what we know is that rule of thumb expansions last on average four to five years but could be longer or shorter, and recessions last between 12 and 14 months. And from 1857 to 2020, we’ve seen a peak-to-trough cycle as short as two months and as long as 65 months, according to the National Bureau of Economic Research (NBER).
No one, unfortunately, has a crystal ball.
People Who Seem to Resemble a Crystal Ball
You can, if you want to, point to people like Nouriel Roubini who predicted the 2008 housing market crash and financial crisis as early as 2006. He forecasted that the bursting of the housing bubble would lead to widespread financial collapse, especially among major banks. Roubini came to his conclusion by analyzing factors like the housing market’s overvaluation, the rise of subprime mortgages, unsustainable debt levels, and risky financial products like mortgage-backed securities and collateralized debt obligations. He warned that these would cause major systemic risks to the economy.
Robert Shiller warned of the collapse of the dot-com bubble in the late 1990s, predicting that tech stocks were massively overvalued and would eventually plummet. Shiller used his stock market valuation model, the Cyclically Adjusted Price-to-Earnings ratio, to show that tech stocks were trading at unsustainably high levels compared to historical averages. He published his concerns in his book Irrational Exuberance, just months before the crash began in 2000.
Paul Krugman predicted Japan’s “Lost Decade,” warning of a major economic stagnation in Japan following the bursting of its asset price bubble in the late 1980s. Krugman analyzed Japan’s rapid property and stock market inflation, concluding that the economy was overheating. He observed that the central bank’s monetary policies were creating a bubble, and when it burst, Japan fell into a prolonged period of deflation and stagnation.
Friedrich Hayek predicted the fall of the Soviet Union, Ray Dalio predicted the 2020 Covid-19 pandemic recession, Roger Bason foresaw the Great Depression, and Paul Tudor Jones saw the October 19, 1987, Black Monday stock market crash.
But these individuals are largely outliers in their ability to predict major economic shifts accurately. Economic forecasting is incredibly difficult, and while some economists have successfully made predictions, the majority of attempts to predict economic cycles are far less accurate. Roubini may have predicted 2008, but many of his later forecasts of subsequent economic collapses never materialized. And Krugman has been criticized for missing other major market shifts.
For most forecasters, making accurate economic predictions is like hitting a moving target—economic predictions require a combination of skill, intuition, and a lot of crazy luck. Even the best experts in the field are wrong as often as they are right.
The Economic Vibe
Back in 2022, Economist Kyla Scanlon coined the term vibecession—meaning the disconnect between the reality of a strong economy versus the general public’s feeling bad about the economy.
This vibecession captures a real phenomenon: people’s experiences don’t always align with what economic indicators show. For instance, GDP growth, record stock market highs, and low unemployment can signal a healthy economy. Yet, if people are still feeling financially squeezed…
Home prices in the United States have increased by 47% since the beginning of 2020, according to the Case-Schiller National Home Price Index (Megan Henney for Fox Business). In practical terms, a home that cost $327,000 (which was already double the price of a home in the 1990s) costs in 2024 $480,690. Those are nationwide numbers, of course. In New Hampshire, some geographical areas are seeing median home prices hit half a million, and other areas hitting a cool million.
Also, nationwide the typical monthly rent in the U.S. is now $1,988—an increase of more than 30% from 2020.
You may have heard the financial rule that your housing costs should never exceed 30% of your total income. Although wages have actually grown by 4.7 percent since 2020 and continue to remain above inflationary prices, as you can see by the Statista Chart above, a measurement of a good economy, housing costs for half of all renters are above the 30% threshold of their annual income (PBS). Additionally, housing costs for 27.4% of all homeowners is also above the 30% threshold of their annual income (Northeastern Global).
Or. Examine the grocery market. Food prices have increased by 24.6%. In 2020, a grocery basket of $100 worth of food now costs $125.
Industry magazines such as Food & Wine argue that grocery inflation prices have actually plummeted, and the real reason for the high cost of food is that American’s “tastes are too damn high,” citing Nepresso pods, bakery bread, organic meat, and the huge number of craft beers.
Except, I don’t know about you, but I feel like an apple from a tree tastes significantly different from an apple in a grocery store. There are invisible forces at work that we the consumer are not so much aware of–such as the proliferation of monopolies keeping prices high, as explained in Adam Conover’s “Food Barons” Jacking Up Your Grocery Bill.
The recent promise Kroger’s made about lowering prices if they were allowed to merge with Albertsons, exemplifies how economic consolidation benefits large corporations but harms consumers and workers. Even though they promised lower prices, monopolies never lead to lower prices. Instead, mega-mergers lead to:
- Job Losses: Efficiency gains through mergers often mean reducing redundant jobs (e.g., warehouse, store management).
- Higher Prices in the Long Term: Despite promises of lower costs due to “efficiency,” reduced competition often leads to higher prices. Fewer competitors mean these large companies can set prices with less concern for undercutting.
- Reduced Local Options: As large chains grow, they can push out smaller, independent stores, leading to fewer choices, particularly in already underserved areas.
The “vibe” becomes one of struggle despite the “reality” of growth. Many even turn to side hustles and part-time gig work such as DoorDash or Uber to make ends meet, which the availability of these second and third jobs, ironically, is a sign of a strong economy.
The Tale of Two Economies
Economic growth often favors certain sectors and demographics.
People with disposable income, stock market investments, or who work in growth industries (e.g., tech, finance) tend to benefit more in times of expansion. Their wealth grows with increased market values, and they can navigate inflation more easily. They may experience growth through:
- Stock market gains: When corporations post record profits, shareholders enjoy dividends.
- Real estate: Homeowners benefit from rising property values, while renters face the squeeze of higher housing costs.
- Tech Boom: Growth industries like AI and automation offer career opportunities and massive financial rewards, but only for a select few who are well-positioned to capitalize.
For the lower- or middle-income groups, economic expansion may translate into:
- Rising costs: Inflation eats away at wage gains, with essential goods (food, rent, utilities) rising faster than salaries.
- Job insecurity: While unemployment may remain low, the quality of jobs matters. Many new positions are in lower-wage sectors (e.g., retail, gig economy) or replace full-time jobs with part-time or contract work.
- Housing crisis: As housing prices soar, fewer people can afford to buy homes, and rents increase dramatically. The same growth benefiting homeowners becomes a major obstacle for renters.
This “two-speed” economy has been documented across many economic expansions. For example, the post-2008 recovery disproportionately benefited wealthier Americans through financial market growth, while wage gains for middle and lower classes lagged behind. Wealth inequality also widened significantly.
Wealth Inequality and The Two Economies
When we talk about two economies, we’re really talking about wealth inequality. In the U.S., wealth disparity has been growing for decades. Economic growth, while real, often accumulates at the top. The top 10% controls over 70% of the nation’s wealth. The wealthiest benefit from capital gains (stocks, real estate), while lower income individuals primarily rely on wages that aren’t rising as fast as the cost of living.
The Four Cycles and Your Personal Budget
The four cycles—expansion, peak, contraction, and trough—are often seen from a macroeconomic viewpoint, affecting businesses, markets, and national policies. However, just as these cycles exist on a large scale, they also unfold on a personal level. Individual households experience their own financial expansions and contractions, influenced by personal income changes, job security, and investment decisions. These personal economic cycles mirror the broader economic shifts but are often felt more acutely due to their direct impact on daily life.
Personal Expansion
Expansion in personal finance is a phase where money flows more easily. This could mean getting a raise, a bonus, or even landing a better-paying job. People tend to save more, invest, or make bigger purchases like a new home. Confidence is high, and many start upgrading their lifestyle—buying new cars, planning vacations, or renovating their homes.
However, this is also the phase where overconfidence sets in. With money coming in, it’s easy to assume that it will continue, leading to increased spending. Credit cards get used more freely, with the belief that future income will cover it. Budgets stretch, and the mindset becomes, “I can afford it now, so why not?” But this thinking can overlook a key reality: financial cycles don’t last forever.
Personal Peak
At the peak of personal finance, people feel financially secure—mortgages are paid, savings are building, and debts are manageable. It’s the point where you might think you’ve reached financial success. But this is also where some may overextend themselves. The manageable debt can quickly spiral if something unexpected happens.
Financial stability can turn fragile here, where any unexpected cost, like a medical bill or a project going over budget, can destabilize the situation. While it may seem like you’re on solid ground, the line between stability and overextension is often thinner than it appears.
Personal Contraction
Contraction sets in when income suddenly drops—a job loss, a pay cut, or an unexpected expense. The lifestyle maintained during the expansion starts to slip out of reach. Bills begin piling up, and the debt that once seemed manageable becomes overwhelming.
This is when juggling priorities becomes necessary—deciding which bills can be paid and which ones will have to wait. The financial obligations taken on during better times now feel much heavier, and you’re forced to reconsider your spending. The pressure to maintain the previous lifestyle despite reduced income can push people further into debt if they’re not careful.
Personal Trough
The trough is the lowest point, where financial hardship is fully realized. For some, it may mean bankruptcy or foreclosure. For others, it’s the painful process of cutting back and starting over. The focus shifts from thriving to surviving, and it’s about making ends meet.
Yet, this phase can also be a turning point. It forces you to live within your means, focus on necessities, and make smarter financial choices. Rebuilding is slow, but it’s where financial lessons are learned, and future resilience is built. You start planning for emergencies and setting new goals to regain stability, eventually moving towards recovery.
The Economy Moral of the Story
If the economy teaches us anything, it’s that the cycles don’t stop. They repeat—whether within the macro global or national economy or within our own personal finances. We move through these phases, sometimes with grace and sometimes kicking and screaming. And while we can’t always predict the next downturn or the next opportunity, the key is to prepare for both the good and the bad times equally.
Free Coffee Giveaway! ☕ Want a chance to win?
Here’s how:
- Share this post on Facebook, LinkedIn, Threads, or X (formerly Twitter), and don’t forget to tag me!
- The more platforms you share on, the more entries you get. If you share on one platform, your name goes in the hat once. Share on all four platforms? That’s four entries!
The contest runs until Wednesday at 11:59 PM, and I’ll announce the winner in Friday’s Footnote email after drawing a name from the hat on Thursday.
Bonus Chance! There are three other posts live right now. If you share each post on all four platforms, you’ll get your name in the hat 16 times. That’s 16 chances to win! Good luck! Here are the three other posts:
- Why I Ditched Time-Blocking and You Should Too
- The Costly Mistake That Left Me Owing the IRS–and How I’m Fixing it
- This One Productivity Technique Will Change Your Life Forever
⬇️ Share by clicking these Buttons! ⬇️
