Definition: A business cycle is the periods of growth and decline in an economy.

There are four stages in the business cycle: 1. Contraction - When the economy starts slowing down. 2. Trough - When the economy hits bottom, usually in a recession. 3. Expansion - When the economy starts growing again. 4. Peak - When the economy is in a state of "irrational exuberance." The National Bureau of Economic Research (NBER) analyzes economic indicators to determine the phases of the business cycle. The Business Cycle Dating Committee uses quarterly GDP growth rates as the primary indicator of economic activity. However, it also uses monthly figures, such as employment, real personal income, industrial production and retail sales. The business cycle is affected by all the forces of supply and demand. However, it is most dependent on the availability of capital, which is dependent upon interest rates. Too much capital will turn a healthy expansion into a peak, at which point greed will bid up the price of assets, often causing inflation. At this point, a stock market correction may indicate that assets are overvalued, creating fear and a contraction. The Federal Reserve lowers interest rates to spur the economy into expansion during a trough. It raises rates during an expansion to avoid too much of a peak. A trough usually is accompanied by a recession and a bear market, while an expansion is usually signaled by a bull market and inflation.(Updated January 3, 2010) Examples: The National Bureau of Economic Research (NBER) is the official arbiter of economic expansions and contractions, or business cycles. WHAT IS RECESSION An economic recession is when growth slows, usually due to a fall-off in consumer demand. As sales drop off, businesses stop expanding. Soon afterwards, they stop hiring new workers. By this time, the recession is usually underway. However, it doesn't affect most people until layoffs begin. As unemployment rises, and consumer purchases fall off even more, housing prices usually decline. Using that definition, most experts agreed the U.S. entered the most recent recession in 2007. However, unlike most recessions, demand for housing slowed down first. That's why most experts thought it was just the end of the housing bubble, not the start of a new recession. Here's the facts:

GDP slowed in the fourth quarter. Businesses orders declined. Employment fell, and unemployment rose. Housing prices fell 10%.

What's not really helpful in knowing what a recession is? The textbook definition of a recession, which states that GDP growth must be negative for two consecutive quarters or more. By that time, the recession has usually been well underway. That's because, for all practical purposes, a recession starts when there are several quarters of slowing but still positive growth. Often a quarter of negative growth will occur, followed by positive growth for several quarters, and then another quarter of negative growth.

A good example was the stock market crash and subsequent economic downturn in 2000. This was not a recession according to the textbook, because GDP growth was negative in Q3 2000, Q1 2001, and Q3 2001, none of which were consecutive. However, anyone who lived through it knows that it felt like a recession during all that time. And in fact, GDP growth did not reach over 3% until Q3 2003. Another good example is the most recent recession, also known as The Great Recession. There were four consecutive quarters of negative GDP growth in the last two quarters of 2008 and the the first two quarters of 2009. However, the recession actually started in the first quarter of 2008. The economy contracted slightly, only .7%, rebounding in the second quarter to .6%. The economy lost 16,000 jobs in January 2008, the first time since 2003 -- another sign the recession was already underway. The only good thing about a recession is that it cures inflation. The balancing act the Federal Reserve must pursue is to slow the economy enough to prevent inflation without triggering a recession. Usually, the Fed does this without the help of fiscal policy. Politicians, who control the Federal budget, generally try to stimulate the economy as much as possible through lowering taxes, spending on social programs and ignoring the budget deficit. This is how the U.S. debt grew to $10.5 trillion before a penny was spent on the Economic Stimulus Package. ( What is GDP growth rate? The GDP growth rate measures how fast the economy is growing. Technically, it is the percentage increase or decrease of GDP (Gross Domestic Product)compared to the previous quarter. Even though the BEA reports quarterly, the growth rate is annualized so it can be compared to the previous year. The GDP growth rate is driven by retail expenditures, government spending, exports and inventory levels. Rises in imports will negatively affect economic growth. The GDP growth rate is the most important indicator of economic health. If it is growing, so will business, jobs and personal income. If it's slowing down, then businesses will hold off investing in new purchases and hiring new employees, waiting to see if the economy will improve. This, in turn, can easily further depress the economy and consumers have less money to spend on purchases. If the GDP growth rate actually turns negative, then the U.S. economy is heading towards or is already in a recession. When the economy is expanding, the GDP growth rate is positive. However, in a recession, the economy contracts. When that happens, the GDP growth rate is negative. This happened most recently in 2008 and 2009, when the GDP growth rate was negative for four quarters in a row. The last time this happened was during the Great Depression. The growth rate turned positive in Q2 2008, and then turned negative again, prompting concerns about a double-dip recession. The growth rate was negative for two quarters during the 2001 recession. To see all occurrences of negative economic growth, see History of Recessions. Because so many things are measured, the BEA often revises the GDP growth rate within a month after releasing it. This can impact the stock market as investors get this new information about the state of the economys health. To see how the GDP growth rate has been changed, see GDP Current Statistics (Updated June 28, 2011) WHAT IS THE IDEAL GDP RATE? The ideal GDP growth rate is one that is sustainable, so that it stays in the expansion phase of the business cycle as long as possible. If GDP growth starts spiking above 4% for several quarters, it

usually means there is an asset bubble of some kind. In 1999-2000, there was irrational exuberance around tech stocks, and in 2003-2005, it was housing. During both bubbles, GDP growth spiked above 4%. When GDP growth is above the ideal, it can also cause inflation. During 1999-200, inflation was 2.73%. Between 2003-2005, it was 3-4%. Once the bubble burst, the economy enters the contraction phase of the business cycle. GDP growth usually falls off sharply, and goes into negative territory, which signals a recession. During 2008-2009, GDP contracted in four of the five quarters. Between 2000-2002, it only rose above 2% in one quarter, and shrank in two quarters. Therefore, economists agree the ideal GDP growth rate is in the range of 2-3%.In between the two recession, economic growth was ideal:

2.5% 3.9% 3.2% 2.8% 2.0%

in in in in in

2003. 2004. 2005. 2006. 2007.

However, annual growth rates can mask a great deal of variability. Looking back, clues of the impending Great Recession were revealed by looking at these less-than-ideal quarterly GDP growth rates. For example, the annual growth rate for 2006 looked great -- 2.8% -- but the quarterly rate showed signs of economic weakness in the second half of the year:

Q1 Q2 Q3 Q4

4.8% 2.7% .8% 1.5%.

In fact, this was the first warning that the housing boom had hit its peak. In 2007, it looked like the economy was recovering, until it took a nosedive into negative territory in Q4:

Q1 Q2 Q3 Q4

.1% 4.8% 4.8% -.02%.

This was caused by the Subprime Mortgage Crisis and resultant Banking Crisis. When the Great Recession ended in 2009, GDP growth initially bounced around the ideal range. See Current GDP Growth Rates.

SUPPLY N DEMAND-How supply and demand are the forces which create the U.S. economy. Supply includes inputs, such as labor, capital, and natural resources. Labor includes employment, unemployment, and productivity. Economic outputs are also explained, including products and services. An explanation of both domestic and international demand. WHAT IS BEAR MARKET:- By definition, a bear market is when the stock market falls for a prolonged period of time, usually by twenty percent or more. It is the opposite of a bull market. This sharp decline in stock prices is normally due to a decrease in corporate profits, or a correction of overvaluation (i.e., stocks were too expensive and fell to more reasonable levels). Investors who are scared by these lower earnings or lofty valuations sell their stock, causing the price to drop. This causes other investors to worry about losing the money they've invested, so they sell as well; the vicious cycle begins. One of the best examples of a prolonged bear market is that of 1970's when stocks went sideways for well over a decade. Experiences such as these are generally what scare would-be investors away from investing. Ironically, this keeps the bear market alive; because no few buyers are purchasing investments, the selling continues. How does a bear market affect my investments? Generally, a bear market will cause the securities you already own to drop in price. The decline in their value may be sudden, or it may be prolonged over the course of time, but the end result is the same: the quoted value of your holdings is lower. This leads to two fundamental principles: 1.) A bear market is only bad if you plan on selling your stock or need your money immediately. 2.) Falling stock prices and depressed markets are the friend of the long-term, value investor. In other words, if you invest with the intent to hold your investments for decades, a bear market is a great opportunity to buy. It always amazes me that the "experts" advocate selling after the market has fallen. The time to sell was before your stocks lost value. If they know everything about your money, why they didn't warn you the crash was coming in the first place? WHAT IS A BULL MARKET:- : A bull market is when the stock market, usually the Dow Jones Industrial Average, increases pretty substantially over time. A bull market usually has to make higher highs and higher lows over a period of time ROLE OD DEMAND IN THE U.S ECONOMY:- What is Demand? Demand drives everything in the economy. All businesses try to understand or guide consumer demand, so they can be the first or the cheapest in delivering the right products and services. If something is in high demand, businesses make more. If they cant make more fast enough, the price goes up. Demand can be measured by a countrys:

Total production of goods and services, Minus its exports, which are demanded by other countries, Plus its imports, which are the items it doesnt make at home.

Measured this way, U.S. economic demand is over $14.2 trillion, which is just over 20% of the worlds total demand. The next largest country, China, has a demand of $7.97 trillion, while Japan's demand is $4.3 trillion. America Has Been the Worlds Best Customer Right now countries need America because we are the largest importer, at $2.1 trillion, twice as large as either Germany ($1.2 trillion), the next largest importer or China ($1.1 trillion), the worlds third largest importer. Because of this role, all countries have an interest in maintaining good relations with the U.S., and in keeping our economy healthy. (Source: CIA World Factbook, 2008 estimate) Why the U.S. Imports so Much The key component of demand is consumer goods and services. Whereas the U.S. supplies all of its own services, it imports goods that can be made more efficiently overseas, such as industrial supplies, oil, telecommunication equipment, autos, clothing and furniture. It is often said that the U.S. has lost its competitive edge in producing these products, and has become a service-oriented economy. The key driver of demand growth is economic growth. Heres how it works. As incomes rise, people are able to buy more. As people buy more, companies can make more, and then pay employees more. The ideal situation is healthy growth without inflation, which has been the situation in the U.S. for the last five years. U.S. Demand Could Decline Since demand is dependent on personal income and wealth, a decline in wealth will lower demand. In fact, the Federal Reserve reported that the median net worth per family rose only 1.5% from 2001 to 2004. Since net worth did not keep up with inflation during these years, the average household feels poorer. Although demand grew, it was financed by home equity loans. As a result, overall debt and debt servicing took a larger percent of family income. In fact, the number of late payments (60+ days) increased, especially among the bottom 80% of the income distribution. As the housing market declined, this reliance on debt has resulted in a decline in U.S. demand. Foreign Demand Could Increase Before the 2008 - 2009 recession, the Organization for Economic Cooperation and Development (OECD) predicted demand in China, India and Russia would grow, thanks to increasing population and personal income. Demand in the U.S., Japan, and Brazil was slowing, even before the recession. The U.K. and the Euro area had mixed indicators, which portended moderate growth. This trend should resume after the recession is over.

. .

ECONOMIC RECESSION:- The textbook definition of a recession is when GDP growth is negative for two consecutive quarters or more. However, no one really knows where this so-

called definition came from or whether it is even useful. Once the economy contracts for two quarters, you've already been in a recession for awhile. That's because a recession is usually preceded by several quarters of slowing but positive growth. The National Bureau of Economic Research (NBER) defines recession as "a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." These are the indicators to watch if you want to know when the economy is in a recession. Why trust the NBER? It's the official arbiter of economic expansions and contractions, or business cycles. It doesn't restrict itself to using the technical definition of two quarters of negative GDP growth. Why not? First, GDP growth is only measured quarterly. Second, it is subject to revisions. By the time GDP growth is negative for two quarters, the recession is already well underway. For this reason, the NBER also monitors the other indicators, which come out monthly.(See NBER, Business Cycle Dating Committee, July 2003; The Business Cycle Peak of March 2001) The NBER declared the Great Recession over as of the third quarter 2009. See Recession Is Over. This was the worst recession since the Great Depression, with five quarters of economic contraction, four of them consecutive, in 2008 and 2009. It was also the longest, lasting for 18 months. The NBER said the 2001 recession lasted between March 2001 - November 2001 even though GDP growth was negative for only one full quarter during that time period.

Dealing with Business Cycles by Dan Ramsey

No businesses are truly recession-proof. All businesses have cycles where sales become easier or harder to make. Consulting services are subject to the same business cycle that most businesses face. Even so, there are steps you can take to minimize the market's downswing and extend its upswing. Identify Cycles First, determine the business cycle for your industry or market. Reviewing income and financial records from prior years or checking with the local chamber of commerce, you can draw a chart illustrating the local business cycle. In your region, it may be that most of the market for your service occurs in the spring and summer. Or the cycle may be fairly equal across the year, but alternate years may fluctuate up or down. The first step to coping with recessions in the local business cycle is to determine exactly what and when that cycle is. Plan for Cycles The next step is to begin planning for it. That is, if you're coming up to a typically slower period, determine what you need to do. In past years, how much has income dropped? For how long? Can you find income sources in other specialties where the cycle is moving up? What expenses can you cut? Do you have an employee who would like a seasonal layoff so he can catch up on other interests? Maybe you need to drastically cut back on your expenses and debts for this period. If so, list them out now and determine which will naturally diminish and which will need to be reduced. If you aren't into your slow season yet, you can also talk to your lender about building a line of credit now that will help you get through the tougher times ahead. Build Assets Another source of cash to tide you through a recession is a second mortgage on your building, your home, or another large asset. Speak with your lender about this opportunity. Even if you decide not to take out a second mortgage, you will be ready if and when you need to do so. Market Expansion

Consider widening your market. That is, travel to a nearby metropolitan area and study whether you can expand your services to reach it. If so, you can pick up additional sales by either subcontracting your services or by promoting your services in the expanded market. It certainly beats starving at home.