Business Cycle

Characteristics of the Business Cycle

Boom

In this phase we would expect the following characteristics:

Main Characteristics:

  • High levels of economic growth

  • High levels of inflation

  • Low levels of unemployment - (zero cyclical unemployment)

Other Characteristics:

  • High levels of confidence

  • Low levels of savings (everyone is spending as everyone is confident in the market and job security)

  • Levelling off of business profits (business profits have slowly stopped increasing)

  • High cash rates

  • High levels of durable and luxury good consumption

  • Lower budget deficit or government surplus

Example: 2012-13 Mining Boom

  • Economic Growth - 4.3% (above 3-4% target rate)

  • Inflation - 3.8% (above 2-3% RBA target)

  • Unemployment - 4.9% (natural rate)

  • Cash rate - 4.75% (highest since the pre-GFC boom)

  • Budget Outcome - Deficit of $23.4 billion 

Trough

In this phase we would expect the following characteristics:

Main Characteristics:

  • Low levels of economic growth

  • Low levels of inflation

  • High levels of unemployment - (high cyclical unemployment)

Other Characteristics:

  • Low levels of confidence - emergence of the tragedy of the thrift 

  • High levels of savings - job insecurity and lack of market confidence causes people to save

  • Lowest  business profits (business profits have slowly stopped decreasing)

  • Low cash rates

  • Low levels of durable and luxury good consumption

  • High budget deficit 

Example: Global Financial Crisis (2008-09)

  • Economic Growth - 0.3%

  • Unemployment - 5.9%

  • Inflation - 1.1% 

  • Budget Outcome - $54.8 billion deficit (highest ever recorded)

  • Cash rate - 3%

CPI-DISC

An easy acronym that helped me describe the characteristics of a phase of the business cycle is CPI-DISC that stands for:

  • Confidence

  • Business Profitability

  • Inflation rate

  • Level of durable and luxury good consumption

  • Interest rates

  • Level of household savings 

  • Cyclical unemployment