Business cycle analysis is the intense review of the free-market economy stages that affect the overall market. The best tips for this analysis is to know the stages, review historical trends, and look at 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 conduct the analysis on a frequent basis, with the review of leading indicators being the most important. This information is specific to each economic market under review.
The four stages in 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 moves. Many economists report information on a monthly basis, which allows both individuals and groups to determine which stage the economy is currently 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 as to why the business cycle shifts from growth to peak to contraction. In many ways, the only way to determine the movements within the business cycle is through the comparison of current economic data to previous years. This data also makes the entire process more intelligible as economists can point to certain activities that may change the business cycle stage. The use of indicators is the most common data applicable here.
Leading indicators are those that economists use to signal changes to the current business cycle. For example, business cycle analysis includes the review of workweek production, building permits, and unemployment claims, along with money supply and inventory changes, to ascertain the current stage or health of the business cycle. When these indicators increase compared to previous periods, the economy may be in the growth stage. Stable indicators can indicate a peak; the decline of leading indicators may signal contraction.
Lagging indicators play a similar role in business cycle analysis, albeit after the economy shifts into a different stage. Examples of lagging indicators include labor costs, business spending, bank loans, and unemployment rates. These indicators typically signal that an economy has left the growth stage and is now at a peak, where little growth occurs in the overall economy. Significant declines in lagging indicators result in the economy being in a contraction period, with several months of decline or low, lagging indicators signaling a trough period.