What is a trough?
In economic parlance, a trough can denote a phase within the business cycle characterized by a decline in activity or prices preceding an upturn.
Understanding Troughs
Five phases comprise the business cycle: expansion, apex, contraction, trough, and recovery. The trough represents the transition from contraction and declining business activity to recovery or increasing business activity. To monitor the various periods of the economic cycle, economists employ a variety of metrics. The most well-known is the gross domestic product (GDP), which measures the value of all domestically produced commodities and services.
A trough is the phase of the business cycle that signifies the transition from declining business activity to expansion. The business cycle comprises expansions and recessions that culminate in troughs and peaks and are characterized by fluctuations in the gross domestic product.
Additionally, employment levels provide insight into the stage of the business cycle that the economy is in. Full employment is consistent with unemployment below 5%, indicating economic expansion. A monthly increase in the unemployment rate almost certainly indicates a contractionary phase of the economy. A decline in the unemployment rate indicates the probable occurrence of a trough. Additionally, income and wages serve as indicators of the business cycle stage of the economy. These reach their minimum during a trough, rise during an expansion, and fall during a contraction.
The leading U.S. stock market indices, including the Standard & Poor’s 500 Index (S&P 500) and the Dow Jones Industrial Average (DJIA), closely monitor the business cycle. Predictably or concurrently with economic contractions, stock market declines occur. An upsurge in stocks after a substantial decline may indicate that an impending or current economic trough is imminent, thereby stimulating economic activity.
Troughs are typically discernible only upon reflection.
Particular Considerations
While troughs are discernible upon reflection, they present a more significant challenge to identify. The declining economic indicators show that the economy is in a contractionary phase. This phase may persist for an extended or brief duration. As indicated by economic indicators, expansion is probable to commence once economic activity resumes to rise; until then, the trough (or bottom) has been established.
Although the severity of troughs may differ, ranging from minor setbacks in economic growth to prolonged periods of adversity, they are commonly characterized by a reduction in business sales and earnings, workforce reductions, limited access to credit, elevated unemployment rates, and the closure of businesses (in comparison to the preceding phases of the business cycle). Troughs hold significance as they signify a favorable juncture in the economic cycle.
Additionally, technical traders may designate swing lows as troughs or swing highs as peaks. The price of an asset fluctuates, creating peaks and troughs.
Instances of troughs within the United States.
The nadir of the economy occurred in June 2009. The Great Recession formally concluded on this date after the economic zenith was attained in December 2007. The dollar attained an all-time high of $14.99 trillion at the end of 2007. The following year and a half saw a steady decline, coinciding with a severe economic contraction. It reached its lowest point of $14.36 trillion in June 2009. Following that, a growth phase ensued, culminating in the GDP exceeding its peak in 2007 and attaining $15.02 trillion by September 2011.
The recession that gripped the United States in the early 1990s reached its nadir in March 1991. The GDP had decreased from $8.98 trillion in July 1990, when the recession commenced, to $8.87 trillion. The unprecedented achievement of GDP exceeding $9 trillion before the end of 1991 indicates that the expansionary phase that followed this recession was a strong revival.
Questions Asked Frequently
When exactly do business cycle declines occur?
A nadir in the business cycle is reached after a recession and the onset of an economic expansion or recovery. The percentage decline in broad indicators of output, employment, income, and sales from its peak to its trough determines the extent of a recession. The degree to which an object or concept spreads throughout economic sectors, industries, and regions is a measure of its diffusion. The amount of time between the signal’s peak and decay serves as a measure of its duration.
Define the phases that comprise the economic cycle.
The economic cycle and the business cycle are interchangeable terms. The expansion, apex, contraction, and trough constitute the four phases.
To what extent does the severity of an economic decline extend?
A recession is a period of negative GDP growth that extends for a minimum of several months and spans two consecutive quarters. A depression is generally characterized as a severe economic downturn that persists for at least three years or reduces actual gross domestic product (GDP) by 10% or more in a year. In contrast to milder recessions, depressing economic conditions are characterized by elevated levels of unemployment and diminished inflation.
What is the difference between a zenith and a decline in economics?
The polar opposite of a trough, a crest, is characterized by a transition from expansion to contraction.
Conclusion
- In economic parlance, a trough can denote a phase within the business cycle characterized by a decline in activity or prices preceding an upturn.
- Gross domestic product (GDP) experiences an upward and downward trend during the business cycle, comprised of expansions and recessions with corresponding peaks and valleys.
- A trough is characterized by elevated levels of unemployment, workforce reductions, a decline in the sales and earnings of businesses, and reduced accessibility to credit.
- Following the nadir, expansion and recovery will commence.
- Identification of the actual trough is only possible in retrospect.