- Is it blue skies for stocks?
(upbeat music)
- The belief that the economy is now strong
enough to remove stimuli.
- And the economy is transitioning...
- First I think we can be on verge
of a significant slowdown in the US economy.
- [Narrator] Is this economy growing or shrinking?
Are we in a boom or a bust?
It can seem confusing, but actually
the economy goes through regular cycles
that are pretty easy to distinguish.
So how do economic cycles work?
Think about the economy going through each cycle
like the seasons of the year.
Contractions are fall and expansions are spring.
The peak is the hottest day of the year,
while the trough is the coldest.
While each stages doesn't have regular intervals,
they do have recognizable indicators.
The first stage of the cycle is expansion.
During expansion, gross domestic product growth
is accelerating with a rate between two to three percent,
and inflation is near two percent.
Unemployment is between four point five and five percent.
And stocks are in a bull market.
Spring ends when the economy overheats
and we see the hottest day of summer.
We've reached the peak.
The economy begins to slow down
and prices have hit their highest levels.
After peak is the contraction or recession phase.
During this phase GDP growth falls below two percent.
If the economy enters a recession,
GDP is actually shrinking.
Usually there are lay offs as the unemployment rate
goes up and stock prices fall.
Sometimes entering a bear market.
A recession normally last for at least six months.
But the Great Recession of the late 2000's
lasted from December of 2007 to June of 2009.
During recessions people often worry about a depression.
But depressions are rare and unlikely.
A depression only occurs if economic growth drops
by at least 10 percent.
Unemployment continues to rise and production nosedives.
But don't worry, depressions last
for multiple years, not a few quarters.
After the contraction phase,
the economy hits the trough or the lowest point.
What we'll call the coldest day in winter.
This point marks the end of the recession,
and the economy begins to grow again.
Spring is coming.
The low prices of the contraction phase
causes an increase in demand while
productions goes up and the unemployment rate decreases.
We've reached the beginning of a new economic cycle.
The phases are managed by legislators.
Legislators like congressmen and women
can use fiscal policy like tax cuts or spending bills
to keep the economy on track.
But each phase is also managed by the Fed.
The Fed or The Federal Reserve System
is the central banking system of the United States.
The Fed was created during Woodrow Wilson's administration
and its job is to manage the economy
by raising or lowering interest rates and printing money.
The interest rates the Fed controls
are the rates bank use to lend money to other banks.
But the rates the set do impact
how much interest you earn on your savings account,
or the rate you'll pay for a mortgage.
Generally, the Fed will lower interest rates
during a downturn to encourage borrowing and spending,
and will raise interest rates during an upswing
to regulate growth and keep it under control.
The important thing to remember
is that expansions and contractions are normal
and you shouldn't panic when they occur.