The economic cycle or business cycle can be defined as the upward and downward movement of the gross domestic product (GDP) with its long-term term growth and trend. The business cycle can be understood by considering the length of a business cycle, which is the period of time that contains a single contraction or boom sequence. Such fluctuations involve shifts over time between periods that have rapid economic growth involving expansion and booms and periods of stagnation and decline which involve contractions and recessions. Business cycles are typically measured by considering the growth rate of the gross domestic product. An analysis of various factors that affect the business cycle and gross domestic product can provide a fair assessment of the economy.
Recession can be defined in economics as a business cycle contraction that usually results in a general slowdown of economic activity. During a recession macroeconomic indicators such as the GDP, capacity utilization, investment spending, business profits, household income, and inflation usually falls. Bankruptcies and the rate of unemployment rises during recessions. Recession can also be defined as a negative economic growth that takes place between two consecutive quarters. A recession usually occurs when the market experiences a significant drop in spending. Such an event could have been triggered by several factors such as a financial crisis, the bursting of an economic bubble, or an external trade shock. Governments usually strive to respond to recessions by opting for expansionary macroeconomic policies like increasing the money supply and money in circulation, decreasing amount of taxes, and increasing the expenditure of the government.
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An economic recession is also marked by a significant economic decline and a drop in the stock market. It results in an increased rate of unemployment and a decrease in the housing market. A recession can be compared to a depression. However, a recession is less severe compared to a depression. The blame for the occurrence of a recession usually falls on the president, the federal leadership, the head of the Federal Reserve, and the entire administration. These individuals are usually put to blame because they can control various factors that could lead to the occurrence of a recession.
Factors that Can Cause Recession
One of the factors that can cause a slowdown and recession of the economy is reduced consumer confidence. In case consumers believe that the economy is bad, they are less likely to spend their money. Even though consumer confidence can be considered psychological, it can have a significant and long-lasting impact on the economy. The quote identifies that there is a general improvement in the mood of society. The current view of many Americans is that the economy is doing well and that the economy is on an upward growth. One of the reasons for this belief is the sentiments of President Trump that the current economy is doing quite well. This increases optimism among consumers who decide to increase their expenditures.
In case of recession, the expansionary monetary policy can be used to fight it. The expansionary monetary policy occurs when the central bank makes use of various tools to stimulate the economy. Such tools could include increasing the money supply, lowering interest rates, and increasing aggregate demand. Such measures usually boost growth as measured by the gross domestic product. The expansionary monetary policy can lower the value of the currency and decrease the exchange rate. The expansionary monetary policy usually prevents the contraction phase of the business cycle. It can be difficult to trace the contraction phase, and the expansionary policy is mostly used after a recession has begun.
The strengthening of banks through processes such as increased capital requirements, improvement of balance sheets, and increased cash holdings can result in an aversion of recession. One process that has improved is where investment banks have strict policies to focus on facilitating client trades and not participating in proprietary trading activities. Banks have also been required to hold more capital against the risks which they take. These measures result in adequate circulation of money in the entire economy and a reduction of debt.
The increased levels of debts such as business or corporate debts, household debt, and government debt may also lead to a recession. The nonfinancial corporate and business debt is at its all-time high in the current economy. Private companies have been taking advantage of the low interest rates in order to get more leverage. The amount of debt for various business entities has increased significantly by 76% from 3.5 trillion to 6.2 trillion. This has caused a significant amount of unrest amongst various entities such as banks that are starting to have a recession watch.
There has also been an increase in household debt over the past few years that can lead to a household debt collapse. This can make it harder for families to recover when recession strikes. The average American household today is 5 percent more in debt compared to the start of the Great Recession. This has been largely caused by student loan debt which caused a significant increase in debt by 144 percent in a short time of 10 years. Consumer debt is a part of the household debt that has increased significantly over the past few years. Consumer debt involves purchasing goods on credit. It does not involve the purchase of productive goods. The current consumer debt is 48% higher than the 2008 economic crash. These signs show that the current economy is on a downward track to another economic downturn and recession.
The United States government is also experiencing the highest amount of debt experienced after the great recession. The U.S. government issued more than 1.3 trillion in debt in 2018. The amount of federal debt has been on the continuous path to growth and progress from the 2000s and skyrocketed after 2008. The increase in debt from the time of the great recession has doubled and increased by 107%. The ever-increasing government debt results in an ever-increasing bubble of the economy which can experience a downturn and recession.
Woeful investments in infrastructure can also lead to a downturn in the economy and recession. There has been a lacking of investment in infrastructure in the United States. Various economic specialists have noted how poor investment in infrastructure can lead to a recession. A large percentage of global infrastructure executives and government officials believe that the United States is underinvesting in infrastructure and this can lead to a crisis.
The income inequality in the United States has increased over the past few decades and is become the worst in American history. The high levels of inequality can be seen in cities and metropolitan areas which experience rising crime, poor social ties, and poor health outcomes. Income inequalities have been found to have a negative effect on the economy and can lead to a recession. This is because income inequality usually poses a negative effect on the resilience of urban counties which reduce the ability to withstand any recession and its shocks. Geographic regions that have less advantaged neighborhoods would have a smaller middle class leaving them more exposed to an economic crisis. Places that are unequal would also be disadvantaged because they will find it difficult to bounce back from any economic downturns. The rising income inequality in the United States will mean that with the advent of an economic downturn, the economy will fail to fight back ultimately leading to a recession.
Fiscal and Monetary Policies Effect on the Economy, the Stock and Bond Markets
A fiscal policy is a decision by the government regarding taxing and spending. Fiscal policies are legal procedures regarding government taxation and spending. A government that wants to stimulate economic growth may increase spending on goods and services. This can result in an increase in demand, an increase in production, increased employment, and a better economy. A monetary policy is an action where authorities establish the rate and growth of the money supplied. Actions such as modification of interest rates, purchase, and selling of government securities and the modification of the amount in reserve can are monetary policies.
The monetary policy will have an effect on the stock market through interest rates. Changes in interest rates will affect the cost of capital which could have a significant effect on the value of cash flows and stock prices. Fiscal policy also leads to increased economic activity that results in an increase in stock prices. Interest rates also have an effect on bond, when interest rates are low, bond yields will decline due to increased demand for bonds.
Consumer Confidence and Sentiment Indexes
Consumer sentiment index is a statistical measurement and an economic indicator of the health of the economy at large as determined by the opinion of consumers. Consumer sentiments provide individual opinions regarding current financial health, the health of the economy in both short-term and long-term growth. A good consumer sentiment index indicates that consumers perceive the economy as strong and stable, this can lead to increased spending.
Consumer confidence index indicates the degree of optimism on the state of the economy that consumers express through different activities such as spending and savings. A high level of consumer confidence means that consumers feel good about their financial condition and the ability to obtain or keep jobs. This can mean that consumers will increase their spending and boost economic growth. The disadvantage of using consumer confidence and sentiment index is that it is difficult to measure. Wrong measurements can lead to poor results which result in a poor assessment of the economy.
Components of GDP
The four components of gross domestic product are government spending, personal consumption, net exports, and business investment. Personal consumption deals with consumer spending such as that in the retail industry. Consumer spending behavior and product demand and supply influences personal consumption. Business investments includes purchases where companies make so as to produce consumer goods. The demand for products influences business investments. Government spending involves the expenditure by the government on various sectors of the economy such as health care and military. Government spending is influenced by priorities of the government. The U.S. government has security as a priority and thus invests a large percentage of budget on military. Net exports involves importation and exportation of items. A high number of exports leads to improved GDP. Net exports depend on the availability and supply of resources within the country.
The Monetarist View and the Keynes Views
The monetarists believe in controlling the supply of money which flows to the economy and allow the other factors of the market to adjust itself. The Keynes believe that the troubled economy will go on a spiral unless there is an intervention by consumers to buy more goods. The monetarists view that the cause of changes money supply is what will have an effect in inflation which influence interest rates in future. The Keynes view that the cause for change is government expenditures, net exports, and consumption have an effect in improving the economy. Empirical evidence of the monetarist opinion can be substantiated by the control of inflation by the Federal Reserve in the 1970s. The empirical relation between the exchange rate and capital flows show that economic growth and currency prices are driven by short-term flows in capital.
Factors Affecting the Retail Industry
The retail industry can be impacted by various factors such as politics/regulation, demographics, and technology issues. Politics and regulations which affect the retail industry include taxes, elections, and advertising laws and regulations. The government requires that various entities pay taxes which can result in reduction in profits. Elections can create uncertainty in the economy which can reduce purchases from customers and profits in the retail industry. Retail companies have to abide by various advertising laws and regulations, these regulations can affect the brand representation of retail companies.
The retail industry is inherently shaped by the consumers that it serves. Changes in consumer demographics will create major changes in the retail industry. The new population could have different interests in clothing and different perceptions regarding the purchase or possession of vehicles or homes. Psychographic data such as age, gender, ethnicity, race, marital status, and household income affect the purchases of various goods in the retail industry. Innovation and technology such as the use of automation and robots can reduce the costs of labor. Retail companies can realize better profits through the adoption of new technologies.
Bond Values and Yields
Period 1:
Coupon rate = 9%
Face value = $1,000
Yield to Maturity = 10%
Time = 25 years
where:
C = the periodic coupon payment
y = the yield to maturity (YTM)
F = the bond’s par or face value
t = time
T = the number of periods until the bond’s mat
From the above formula:
Present value = $909.23
Period 2
Coupon rate = 9%
Face value = $1,000
Yield to Maturity = 13%
Time = 21 years
Present value = $715.94
