What Is a Trough?
Let me explain what a trough means in economics. It's that point in the business cycle where things are hitting rock bottom—economic activity or prices are at their lowest before they start climbing back up.
Key Takeaways
- A trough, in economic terms, can refer to a stage in the business cycle where activity is bottoming, or where prices are bottoming, before a rise.
- The business cycle is the upward and downward movement of gross domestic product (GDP) and consists of recessions and expansions that end in peaks and troughs.
- A trough is marked by conditions like higher unemployment, layoffs, declining business sales and earnings, and lower credit availability.
- After the trough, recovery and expansion begin.
- The actual trough can only be identified in hindsight.
Understanding Troughs
You need to know that the business cycle goes through five phases: expansion, peak, contraction, trough, and recovery. The trough is where we're shifting from contraction— that's declining business activity—to recovery, which means things are picking up. Economists track this with metrics like gross domestic product (GDP), the total value of all goods and services a country produces.
A trough specifically marks the end of declining business activity and the start of expansion. The business cycle involves ups and downs in GDP, with recessions and expansions leading to peaks and troughs.
Employment is another key indicator. When unemployment is below 5%, that's full employment and signals expansion. If it rises month to month, we're likely in contraction. When it bottoms out, you've probably hit the trough. Income and wages follow suit—they rise in expansion, fall in contraction, and hit bottom at the trough.
Stock market indices like the Dow Jones Industrial Average (DJIA) and S&P 500 also mirror the cycle. Declines in stocks often signal or precede economic contraction. When stocks rally after a big drop, it might mean the trough is here or near, pointing to upcoming economic growth.
Special Considerations
Remember, troughs are usually only apparent in hindsight. As indicators contract, the economy is in that phase, which can be short or long. It's only when activity starts increasing again that we see expansion underway and confirm the trough has passed.
Troughs vary in severity—some are just minor dips, others are prolonged hardships. They're typically marked by falling business sales and earnings, layoffs, tight credit, higher unemployment, and business closures compared to other phases. They're crucial because they signal a positive turn for the economy.
In technical trading, you might hear swing lows called troughs and swing highs as peaks. Asset prices fluctuate, creating these peaks and troughs.
Examples of Troughs in the U.S.
Take the economic trough in June 2009, which ended the Great Recession that started after the peak in December 2007. U.S. GDP hit a high of $14.99 trillion at the end of 2007, then fell steadily. It bottomed at $14.36 trillion in June 2009, followed by expansion that pushed it past the previous high to $15.02 trillion by September 2011.
Another example is the early 1990s recession trough in March 1991. GDP was at $8.87 trillion then, down from $8.98 trillion in July 1990 when the recession began. The recovery was strong, with GDP exceeding $9 trillion by the end of 1991.
Frequently Asked Questions
When do troughs in the business cycle occur? A trough happens when a recession ends and recovery or expansion starts. The depth of a recession is measured by the drop from peak to trough in output, employment, income, and sales. Its spread covers economic activities, industries, and regions, and duration is the time from peak to trough.
What are the stages of the economic cycle? The economic cycle, or business cycle, has four stages: expansion, peak, contraction, and trough.
What are the levels of severity of an economic trough? A recession is negative GDP growth over two quarters, lasting months or longer. A depression is an extreme recession lasting three years or more, with at least a 10% GDP decline, often with high unemployment and low inflation. Depressions are rarer than recessions.
What is a peak vs. a trough in economics? A peak is the high point where expansion turns to contraction, the opposite of a trough.
