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There's been a lot of talk about recessions lately. Mostly pundits have been warning us that a recession is on the horizon. Recession is a word that appears to strike fear in the hearts of ordinary investors and while it's easy to understand why, that's entirely the opposite of the reaction they should have.
A recession certainly can be painful if it results in a job loss, but for the longer term, it can be healthy for the overall economy. The media has positioned recessions as the monster in the basement, woods or under the bed (whichever you find most frightening). Instead of being an aberration, the business cycle, which reflects the expansion and contraction of the economy, is as natural as the seasons. Business cycles have four phases: expansions, peaks, contractions and troughs.
- An economic expansion is characterized by positive gross domestic product (GDP) growth, low unemployment, a bull market and consumer confidence.
- A business cycle peak is the transition from the end of the expansion to the contraction.
- During a contraction, consumer demand slows, the economy weakens, unemployment increases and stock prices usually decline. A recession occurs when GDP growth has been negative for two successive quarters.
- A trough represents the transition from the contraction phase to the expansion phase.
The Business Cycle
The brown line represents a demarcation for entering a recession (two consecutive quarters of negative GDP).
(Source: Thornburg, Corporate Finance Institute)
Jan Blakeley Holman is director of advisor education at Thornburg Investment Management. Jan has spent 44 years in the financial services industry. Over the course of her career, she's served as a financial advisor, an advisor to financial advisors, and a financial services corporate executive. Jan has a BA in political science from the University of Denver.
