What Is Expansion?

Expansion is the phase of the business cycle where real gross domestic product (real GDP) grows for two or more consecutive quarters, moving from a trough to a peak. Expansion is typically accompanied by a rise in employment, consumer confidence, and equity markets and is also referred to as an 澳洲幸运5官方开奖结果体彩网:economic recovery.

Understanding Expansion

The rise and fall of 澳洲幸运5官方开奖结果体彩网:economic growth is not a completely random, unexplainable phenomenon. Like the weather, the economy is believed to follow a cyclical path that continues to repeat itself over time. This process is called the 澳洲幸运5官方开奖结果体彩网:business cycle and is broken down into four distinct, identifiable phases:

1. Expansion: The economy is moving out of recession. Money is cheap to borrow, businesses build up 澳洲幸运5官方开奖结果体彩网:inventories again and consumers start spending. GDP rises, 澳洲幸运5官方开奖结果体彩网:per capita income grows, unemployment declines, and equity markets generally perform well.
2. Peak: The expansion phase eventually peaks. Sharp demand leads the cost of goods to soar and suddenly 澳洲幸运5官方开奖结果体彩网:economic indicators stop growing.
3. Contraction: Economic growth begins to weaken. Companies stop hiring as demand tapers off and then begin laying off staff to reduce expenses.
4. Trough: The economy transitions from the 澳洲幸运5官方开奖结果体彩网:contraction phase to the expansion phase. The economy hits rock bottom, paving the way for a recovery. 

澳洲幸运5官方开奖结果体彩网:Economists, p🐎olicymakers, and investors closely study business cycl🌞es. Learning about economic expansion and contraction patterns of the past can assist in forecasting potential future trends and identifying investment opportunities.

Expansions last on average about four to five years but have been known to go on anywhere from 10 months to more than 10 years. The 澳洲幸运5官方开奖结果体彩网:National Bureau of Eco🎃nomic Research (NBER) determines the dates for business cycles in the United States.

Special Considerations

Leading indicators such as average weekly hours worked by manufacturing employees, unemployment claims, new orders for consumer goods, and 澳洲幸运5官方开奖结果体彩网:building permits ⛦;all give clues as to whether an expansion or contraction is occurring in the near future. 

However, economists and analysts generally agree that there are two main forces that best determine corporate profits and the state of the general economy: 澳洲幸运5官方开奖结果体彩网:capital expenditure (CapEx), the money companies spend on maintaining, improving, and buying new assets; and 澳洲幸运5官方开奖结果体彩网:interest rates.

The Credit Cycle

When the economy needs a lift, policymakers try to lower borrowing costs, encouraging businesses and consumers to spend more. When the 澳洲幸运5官方开奖结果体彩网:Federal Reserve (Fed) cuts interest rates, saving is no longer favorable and the expansion phase begins. Money flows freely through the ಞeconomy, companies take on loans to f𝐆und expansion, job prospects improve, and consumer spending rockets.

Eventually, the cheap flow of money and subsequent increase in spending will cause 澳洲幸运5官方开奖结果体彩网:inflation to rise, leading 澳洲幸运5官方开奖结果体彩网:central banks to hike interest rates. Suddenly the onus is on encouraging people to rein in on spendin🍸g and moderating economic growth. Company revenues fall, share prices decline, and the economy contracts again.

The CapEx Cycle

Several economists, includin🧔g Irving Fisher, note that cycles move in tandem with company attempt🅘s to match ever-changing consumer demand. When the economy is growing, customers are buying and borrowing costs are cheap, management teams regularly seek to capitalize by ramping up production.

At first, this leads to higher sales and decent 澳洲幸运5官方开奖结果体彩网:returns on invested capital (ROIC). Later, the competition gets fiercer and greed takes its toll. Eventually, 澳洲幸运5官方开奖结果体彩网:supply outstrips demand, pricౠes fall, early debt binges become more difficult to service, and companies are left with no choice but to lay off staff.