Understanding economic cycles

By definition and experience I believe that most people around the world are by now familiar with the term global recession. What I also assume is that many people heard about the recession, doesn’t really know what it means and therefore looses sleep over something of which they almost certainly have no control.
I am in no way trying to tell you that you should not be concerned about economic cycles. On the contrary, I think it is very important that you are well aware of the global economic cycle and how it will affect you and your business. It is also just as important to know how the economic conditions will not affect you or your business.
It is due to the constant CHANGE in the economy that most people feel uncomfortable, insecure and afraid. If you know how economic cycles work you will understand it better, and hopefully feel better about it. It is normally not the concept of economic cycles that scares people. It is the fear of the unknown and unpredictability of the economy, especially during a recession that causes people to loose vision and hope.

By equipping yourself with knowledge and skills regarding the economic cycles you will enable yourself to ride the waves of even the stormiest economies.
The good news for those who are currently finding themselves at the bottom of the economic cycle is that the cycle is at the bottom, and if it is not already going upwards, it will soon start go better.

Although I have strong interest in the science of economy, I will not attempt to give you a lecture in economy. I am simply going to give you a glimpse of the signs of times during the various stages of the economic cycle.

If we consider the economic cycles and how it applies to everyone today we can identify the following behaviour during the economic cycle:

At the top and going down – We are flying

At the top of an economic cycle society buys and spends at enormous rates. People are overbought and you will see newspaper headlines talking about consumer debt to income ratios that are increasing. Society is over-optimistic and life is just great.
It is a brilliant idea to keep track of these ratios to help you keep track of where you currently are in your economic cycle.

At some stage during the top of the economic cycle you will find that a spending becomes saturated. Society becomes so overbought that they either won’t buy, can’t buy, or simply don’t need to buy anymore.

When people are spending too much and rely primarily on credit to do so, you will find that it is usually the banks that make the first move in cutting off access to credit.
People find themselves in a position where the cash dries up, it becomes nearly impossible to get access to credit and there are talks of rising interest rates on the horizon.

Consumers start to show some concern and start to cut back on spending. Businesses respond to this reduction in spending by reducing production and getting rid of excess stock in their warehouses. Prices begin to slip as companies try to get rid of their inventory, and the “buy one get one free” turns into “buy a car and get a year’s fuel supply for free”. The Services sector has inventory in the form of people, and layoffs begin in order to reduce inventory. Once the layoffs begin we are crossing over into the bottom of the economic cycle.

At the bottom where we feel the heat – life is terrible.

As the layoffs begin people start to show more concern, and those who lost their jobs are in a state of panic. Those who lost their jobs can’t spend anymore. Those who have not lost their jobs also stop spending out of concern that they might be next.
Many of the people who didn’t lose their jobs have to settle for a reduction in their salaries. Car payments and mortgages fall behind. The banks shift their focus away from mortgage originators and start looking for auctioneers to get rid of the properties in possession. Panic sets in as stock markets loose track. Financial indicators has no loyalty to hang on to. Crude oil prices drop significantly and everyone hopes that it won’t get any worse than this. Life is miserable, governments are corrupted, unemployment is at a new record high, and somehow the minister of education hopes for better exam results this year.
There are many economists who reckon that there is more money in the average person’s bank account at the bottom of the economic cycle than there is at the top. This is due to the tendency to save or hold back during tougher times. It is rather the consumer’s confidence that disappears than the cash itself.

The time has come to move in for the kill for those who have learnt to read the signs and exploit the opportunities of a down economy. Employment can be found at low rates as people are desperately looking for work. Property prices are down and everywhere you look there are “for sale” signs. Businesses who are familiar with the economic cycles will now move in to gain market share, and smart money starts to shift around.

Small positive stories begin to surface. There are signs of people beginning to buy again. There is some hiring taking place. Confidence is beginning to look a little bit better. Some more hiring takes place, buying increases and confidence levels begin to rise. We are moving up to the top again.

Crossing over and moving up – Life isn’t that bad after all

We are moving up again. What have learnt from all this suffering?
That it is good to save during good times, so that we have some reserve (smart money) during the tougher times.

Unfortunately life doesn’t work like that. Most people will soon forget about the heartache, concern and panic. As we move upwards, buying increases, prices of goods and services start to rise, salaries increase and society begins to build and improve on their dreams. Large investments and new projects begin as investors realise that the upward trend is for real. Auctioneers are looking at alternative income options while developers, real estate agencies and mortgage brokers begin to rise up from the grave.

More positive news hits the streets and people realise that life isn’t that bad after all.
There is some concern about rising prices, the stock markets are booming, you now have two cell phones and wonder how you ever managed with only one. Business is booming and we are flying. Let’s hire more people…

No economy can stay down. It will rise again. The question you should be asking yourself is this:
What can you do to benefit from the downswing in your economy?