Cycles

The economy does not rise in a straight line. It breathes. It speeds up, runs out of breath, falls back, then starts again.

This is called the cycle. Four phases that repeat, but never with the same length.

First phase: expansion. Companies sell, hire, invest.

Credit is easy, banks lend willingly. Workers find jobs, and can negotiate.

The job market tightens: companies struggle to recruit. They raise wages to attract people.

Second phase: overheating. Demand runs faster than what the economy can produce.

Prices speed up. Wages follow, then prices again. Assets, property and shares, rise faster than the economy.

This is often when the central bank raises its rates. To cool the machine, before it runs away.

Credit becomes expensive. Households buy less, companies invest less.

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Third phase: recession. Output falls, companies close, unemployment rises.

A common definition: two quarters in a row of falling GDP. For example, minus zero point two, then minus zero point three per cent.

But it is a convention, not a law. In the United States, a committee of economists decides by looking at many other numbers.

In two thousand twenty-two, American GDP was first measured falling two quarters in a row. No recession was declared: jobs stayed strong.

Fourth phase: recovery. And this is where everyone gets caught out.

March two thousand nine. The American stock market hits its lowest point. The economic news is catastrophic.

The recession only ends in June. And unemployment keeps rising until October, to ten per cent.

Meanwhile, the market has already taken off. It does not wait for good news. It anticipates the end of bad news.

Two thousand twenty, same script. Low point in March, and by August, a new record, despite still high unemployment.

The market looks six months or a year ahead. The economy is measured in the rear-view mirror.

The twist: the market is wrong too. An economist, Paul Samuelson, joked that it had predicted nine of the last five recessions.

Nobody can date the phases in advance. They are almost always recognised after the fact.

For the saver, the lesson is simple: waiting for the economy to improve before investing often means arriving after the recovery.

Cycles cannot be predicted. They are lived through. With an emergency fund, and a horizon long enough to see the next one.