Economic Trough 2021-01-11 08:00:00

Economic Trough

An economic trough occurs after an expansion. Troughs are a regular part of the business cycle. As an economy expands and its GDP grows, it will eventually reach a peak. The economy will then begin to contract as it slides down the backside of the peak and goes into recession. From there, the economy will hit a trough — its lowest point in the cycle. In a trough, the stock market may hit bottom, unemployment is highest, credit is difficult to obtain, and business sales and earnings are at their worst. As the economy pulls out of the trough, expansion begins again.

Every economy has three main goals: promoting growth, limiting unemployment, and keeping prices stable. The economy’s government manages those goals. There are two phases to the business or economic cycle — expansion and contraction. GDP measures these phases over time. The peak and trough can be thought of as points in the expansion and contraction phases. The time between each peak and trough can vary by a few quarters to years. These variations in time are dependent on the natural cycle or government interventions.

There are three ways that the cycle may reach a trough. One is through time. Eventually, GDP growth will contract to its lowest point, creating a trough. The second way is through a shock. A shock is an unexpected event such as a terrorist attack, pandemic, or sudden limitation in a major commodity, such as an oil shock. The third is through government intervention.

Governments try to regulate the cycle through monetary and fiscal policies. These interventions can sometimes distort the growth and contraction cycles. Governments are always trying to curb growth, so an economy doesn’t get too hot and stimulate a slow economy or one that is in recession. A slow economy or one that is in recession will be at or near its trough for the cycle.


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