What Does A Boom And Bust Cycle Mean For Your Personal And Business Planning?

A boom and bust cycle refers to the alternating periods of economic growth and decline during a business cycle, which is primarily measured by an economy’s gross domestic product (GDP). This cyclical process of economic expansion and contraction consists of four phases, which can affect personal or business finances in different ways.

1. Boom: The boom phase of the business cycle is marked by expansion. During a boom, credit is cheap and easy to obtain, making it easier for businesses to expand. Expansion results in job creation. High rates of employment make it easier for consumers to borrow to purchase homes, vehicles and big-ticket consumer goods like appliances, furniture or building materials for home renovations.
2. Peak: Eventually, the economy will reach a saturation point. Prices peak and economic indicators are at their highest, leaving little room for future growth. The same cheap credit that ushered in the boom times can lead to overinvestment, resulting in business overexpansion, overbuilt housing and surpluses in raw materials and finished consumer goods. This reversal in supply and demand inevitably leads to economic contraction.
3. Bust: As goods linger on store shelves or in warehouses, they depreciate in value and prices begin to fall. Companies that can’t move goods or experience shrinking revenues begin to halt or delay wage increases and lay off employees. Unemployed or underemployed consumers can’t pay off existing debt and credit becomes more expensive and difficult to obtain. Recession occurs when wages, income and output fall.
4. Trough: A trough marks the low point of the business cycle. During this period, the economy will bottom out. But it’s not all bad news. Since there’s nowhere to go from here but up, the economy will begin to rebound into the next expansion phase. This is often accelerated by government interventions designed to stimulate economic growth.

How long does the average business cycle last?

Data compiled by the National Bureau of Economic Research (NBER) illustrates that since World War II the economy has experienced longer periods of expansion than contraction. For example, between 1945 and 2019, the end of the most recent business cycle, the average expansion has lasted about 65 months and the average recession has lasted about 11 months. Prior to that, between the 1850s and World War II, the average expansion lasted less than half as long (about 26 months), and the average recession lasted about twice as long (about 21 months). The 2009-2020 expansion was the longest on record at 128 months.

Five strategies for managing through boom and bust cycles

While boom and bust periods are a natural part of the business and economic cycle and generally result in driving growth and new opportunities over time, they can be daunting to manage through. They can also impact short and long-term decision-making and quality of life. For example, in a tight job market, people may be hesitant to leave a job they don’t like or that is not an ideal fit for their talents or skills. A business owner may second guess their plans to expand, even if customer demographics and other data support moving forward with their plans.

Below are five strategies to help you make confident decisions about your personal and business finances through each stage of the business cycle and in any economic climate.

1. Diversify. Most people are familiar with the adage “don’t put all of your eggs in one basket.” These are words to live by whether you’re managing a business or managing your finances. When it comes to your investments, portfolio diversification takes many different aspects into consideration, including the correlation between markets, asset classes and investment types, and whether holdings are actively or passively managed. A well-diversified portfolio will also reflect your personal goals, risk tolerance and investment timeframe, in addition to other criteria. Where businesses are concerned, diversifying income and revenue streams can help protect the business during an economic downturn versus relying on a single revenue source. That may mean expanding the number of customers your serve, so the loss of one account doesn’t put the entire business at risk. It could also mean expanding your geography, product and service offering, the way you deliver services (digital versus in-person), and/or your target audiences.
2. Continue to build savings. People often seek ways to reduce spending and build savings when the economy enters a recession. While we don’t always know when a recession will occur, we do know that eventually one will, since they are a natural part of the business cycle. Therefore, it makes sense to prepare for them well in advance. That includes beefing up emergency savings during boom periods and continuing to make long-term investments in your future, such as regular retirement plan contributions. Contributing regularly to retirement plans can help even out the share prices of investments purchased over time, potentially buying more shares when markets are tumbling, and prices are down.
3. Manage debt. After years of low interest rates, Americans are currently feeling the pinch of rising rates, especially when it comes to credit card debt. This is one of the first places consumers feel the impact of rising rates on their budgets since credit card rates are tied to the prime rate. When the Fed raises its target rate, the prime rate goes up and variable interest rates follow, such as the annual percentage rates (APRs) credit card companies charge consumers for revolving debt. Even a small percentage increase can take a toll on your budget by raising minimum payments due on revolving credit—making it harder to pay down principal over time. To avoid budget surprises when the economy takes a turn, keep credit card debt in check and whenever possible, try to pay balances in full each month.
4. Keep job skills current. Keeping your skills current is one of the most effective ways to prepare for new opportunities that may arise in your current work environment or find a new job in a difficult economy. Begin by evaluating your current skills and comparing them to what employers in your field are seeking from candidates. Then take any necessary steps to strengthen your skills or fill in any gaps in training or education. Many employers encourage talent development by offering free or reduced-cost training and incentives for obtaining advanced degrees and professional designations and certifications. Be sure to research what your employer offers and take advantage of any cost-saving opportunities to increase your skillset and marketability and set yourself up for the next raise or promotion.
5. Find your freedom. It can be easy to get caught up in a herd mentality. This could be due to a fear of missing out in boom times or panicking when markets are going south. However, blindly following the herd that can lead to decisions that are not in your best interests, such as buying the wrong assets for the wrong reasons, overpaying for assets, or selling investments at the wrong time. Instead, put a financial plan in place that not only takes every phase of the boom and bust cycle into account, but is fully aligned with your personal goals, risk tolerance and the time frames you have determined for accomplishing your goals. Following a path that is specifically designed for you is the very definition of freedom.

To learn more about how a focused and personalized approach can lead to the financial freedom you seek, download our complimentary guide, Your Family Index Number: Defining Your Future With Confidence.