What Is Expansion?
Let me explain expansion directly: it's that phase in the business cycle where real gross domestic product, or real GDP, grows for two or more consecutive quarters, taking the economy from a trough right up to a peak. You'll see it come with increases in employment, consumer confidence, and equity markets, and people often call it an economic recovery.
Key Takeaways
- Expansion is the business cycle phase when the economy moves from a trough to a peak.
- Expansions last on average about four to five years but have been known to go on anywhere from 10 months to more than a decade.
- Focusing on interest rates and capital expenditure can help investors to determine where we are in the business cycle.
Understanding Expansion
You should know that the rise and fall of economic growth isn't some random event—it's part of a cyclical path the economy follows, repeating over time. We call this the business cycle, and it breaks down into four distinct phases. In expansion, the economy pulls out of recession; money is cheap to borrow, businesses restock inventories, and consumers spend more. GDP goes up, per capita income increases, unemployment drops, and equity markets do well.
Then comes the peak, where the expansion tops out—sharp demand pushes up goods costs, and economic indicators stall. Contraction follows, with growth weakening; companies halt hiring as demand falls, then lay off staff to cut costs. Finally, the trough hits rock bottom, setting up for recovery and the next expansion.
As someone studying this, I can tell you economists, policymakers, and investors watch these cycles closely. Looking at past expansion and contraction patterns helps forecast future trends and spot investment opportunities. Expansions average four to five years but can run from 10 months to over 10 years, and in the US, the National Bureau of Economic Research, or NBER, sets the official dates.
Fast Fact
Here's a quick note: the longest US expansion on record lasted 128 months, or just over 10 and a half years, ending in February 2020, according to the NBER.
Special Considerations
Pay attention to leading indicators like average weekly hours worked by manufacturing employees, unemployment claims, new orders for consumer goods, and building permits—they signal if an expansion or contraction is coming soon.
That said, economists and analysts generally point to two main forces driving corporate profits and the overall economy: capital expenditure, or CapEx, which is the money companies spend on maintaining, improving, and buying new assets, and interest rates.
The Credit Cycle
When the economy needs a boost, policymakers lower borrowing costs to encourage spending by businesses and consumers. If the Federal Reserve cuts interest rates, saving loses appeal, and the expansion kicks off. Money flows easily, companies borrow for growth, jobs improve, and consumer spending surges.
But eventually, this cheap money and spending spike cause inflation to rise, so central banks hike rates. Now the focus shifts to curbing spending and moderating growth. Company revenues drop, share prices fall, and the economy contracts again.
The CapEx Cycle
Several economists, including Irving Fisher, observe that cycles align with companies trying to match shifting consumer demand. During growth, with customers buying and low borrowing costs, management teams ramp up production to capitalize.
Initially, this brings higher sales and good returns on invested capital. But competition intensifies, and overreach happens. Supply eventually exceeds demand, prices drop, early debts get harder to pay, and companies must lay off staff.
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