Every market goes through all four stages of the business cycle naturally.
Business cycle analysis is the intense review of the stages of the free market economy that affect the market as a whole. The best tips for this analysis are to know the stages, review historical trends, and look for specific leading or lagging indicators. All of these factors and others specific to the economic market can help individuals and groups understand business cycle analysis. Companies should perform the analysis frequently, with the review of leading indicators being the most important. This information is specific to each economic market analysed.
The four stages of the business cycle are growth, peak, contraction, and trough. Markets go through each stage naturally, especially those markets with little or no government intervention. It is often difficult to determine when the cycle changes stages. Therefore, business cycle analysis can help individuals and groups determine these movements. Many economists publish data monthly, allowing individuals and groups to determine what stage the economy is in.
Historical trends provide economic records that allow individuals and groups to determine the stage of the current business cycle. History can also provide more information about why the business cycle changes from growth to peak to contraction. In many ways, the only way to determine movements within the business cycle is by comparing current economic data to previous years. These data also make the whole process more intelligible, as economists can identify certain activities that can change the stage of the business cycle. The use of indicators is the most common datum applicable here.
Leading indicators are those that economists use to signal changes in the current business cycle. For example, business cycle analysis includes review of workweek production, building permits, and jobless claims, along with cash supply and inventory changes, to check the current stage or health of the business cycle. When these indicators increase in relation to previous periods, the economy may be in a growth phase. Stable indicators may indicate a spike; declining leading indicators may signal a contraction.
Lagging indicators play a similar role in business cycle analysis, albeit after the economy changes to a different stage. Examples of lagging indicators include labor costs, business expenses, bank loans, and unemployment rates. These indicators generally signal that an economy has come out of the growth stage and is now at a peak where there is little growth in the economy as a whole. Significant declines in lagging indicators result in a period of contraction in the economy, with several months of falling or bearish lagging indicators signaling a bearish period.