Trough (Economics) - Explained
What is a Economic Trough?
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Table of ContentsWhat is a Trough (Economy)?What Causes Troughs?Illustrations of U.S Economic TroughsAcademic Research on Troughs
What is a Trough (Economy)?
A trough is a period which signifies that a country's economy or business cycle has stopped declining. Troughs usually signify that economic decline has now turned in the opposite direction, and the economy is either growing or expanding. An economys' business cycle is the upward or downward movement of the gross domestic product (GDP), and it comprises of recessions and upturns which usually end in troughs or peaks (a point where a booming economy starts declining). In technical analysis, troughs are also known as swing lows, and peaks are called swing highs. Troughs are very important in a nation, as they depict the reversal of a declining economy. Both swing highs and swing lows are formed by prices of securities and assets. Important Note
- An economy's business cycle comprises of recessions, upturns, troughs, and peaks.
- A trough is the stage where recession ends and a boom starts
- A trough can only be said to exist when economic indicators start showing improvements. Until then, we cannot conclude that a recession is over.
- Troughs are only visible when an economy have faced high unemployment, declining earnings and sales, as well as low availability of credits.
What Causes Troughs?
In an economy, the business cycle comprises of troughs, peaks, recessions and upturns. Troughs are the bottom stage of a business cycle, where recession stops and the economy moves upwards or a boom occurs. Troughs mark the availability of employment, reduced layoffs, and high credits. In economics, different metrics are used, especially the GDP, which examines the values of goods manufactured in a nation. The employment rate of an economy is also used as a metric to determine recession and expansions. A country where less than 5% of the citizens or masses are unemployed can be said to be booming. If unemployment increases, we can say that a peak has occurred, and when this increase finally dies out and unemployment moves up to 5% or less, then we can say that a trough has occurred. Economists also takes into account the income and wages in an economic state. When these wages increases during an upturn, and then falls back and starts receding, we can say a peak has occurred. Also, when income and wages are declining and then shoots up, then a trough is visible. In the U.S, major stock markets also affect the direction of an economy. Market indices such as the Dow Jones Industrial Index (DJIA), and the S&P 500 can contribute to recessions and expansions. If these indices start pushing up after a series of losses or decline, then it is possible that a trough will kick in soon. Troughs are hard to spot in reality, but can be easily pointed out in hindsight. An economy is only said to boom when economic indicators or metrics are rising. This is usually after a period of decline or recession. Troughs are as a result of declining employment rate, high unemployment, low GDP, low wages and other indicators. They also differ in nature, as some are just minor economic recessions, while others are as a result of recurrent contractions, or steady decline of an economic state.
Illustrations of U.S Economic Troughs
In June 2009, an economic trough occurred, one that marked the end of the Great Recession which has been haunting the nation since it reached its peak in December 2007. Before the Great Recession started, the US GDP reached its peak volume at $14.99 trillion its highest in history and then started declining steadily, till it bottomed out at $14.36 trillion in June 2007. After that, a trough occurred, which marked the nations increase in GDP to $15.02 trillion in September 2011, breaking the history which was set in 2007. Also, the recession of the early 90s marked the occurrence of a trough in March 1991. The GDP which reached a volume of $8.98 trillion declined to $8.87, and later increased to $9 trillion before the end of the year.
Academic Research on Troughs
- A Marxist theory of the business cycle, Sherman, H., & Sherman, H. (1979). A Marxist theory of the business cycle. Review of Radical Political Economics, 11(1), 1-23.
- Real estate risk and the business cycle: evidence from security markets, Sagalyn, L. (1990). Real estate risk and the business cycle: evidence from security markets. Journal of Real Estate Research, 5(2), 203-219.
- Regional economic integration and national economic growth, Burns, L. S. (1987). Regional economic integration and national economic growth. Regional Studies, 21(4), 327-342.
- Term structure forecasts economic growth, Harvey, C. R. (1993). Term structure forecasts economic growth. Financial Analysts Journal, 49(3), 6-8.
- On predicting the stage of the business cycle, Webb, R. H. (1991). On predicting the stage of the business cycle. Leading economic indicators: New approaches and forecasting records, 109-127
- Economic sources of inventive activity, Schmookler, J. (1962). Economic sources of inventive activity. The Journal of Economic History, 22(1), 1-20.
- Cyclical patterns in the variance of economic activity, French, M. W., & Sichel, D. E. (1993). Cyclical patterns in the variance of economic activity. Journal of Business & Economic Statistics, 11(1), 113-119.
- The business cycle theory of Wesley Mitchell, Sherman, H. (2001). The business cycle theory of Wesley Mitchell. Journal of Economic Issues, 35(1), 85-97.
- The generation of stock market cycles, Bolten, S. E., & Weigand, R. A. (1998). The generation of stock market cycles. Financial Review, 33(1), 77-84.
- Business cycle and aggregate industry mergers, Komlenovic, S., Mamun, A., & Mishra, D. (2011). Business cycle and aggregate industry mergers. Journal of Economics and Finance, 35(3), 239-259.