Period of economic growth and recession for traders
The period of economic growth and recession for traders is important information. The discussion of the temporary “lag” between the occurrence of certain events and the official announcement of them, probably caused you to ask how traders can determine at what stage of the business cycle the economy is at the moment and how can this information be used for own purposes. Most economists explain the existence of business cycles by the instability of economic development. For example, the acceleration of economic development is the result of spikes in individual or public spending. For example, during a war, government spending increases, which provides prosperity to companies whose business is somehow connected with the conduct of hostilities. To fulfill increased government orders, such companies often have to hire additional labor.Employees of such companies receive increased wages and enter the market with this extra money. As consumer optimism grows, other companies have to fulfill the increased desires and needs of consumers, which in turn leads to an increase in production in companies whose business is not directly related to meeting the needs of national defense.
When the same factors act in the opposite direction, there is no doubt that a recession awaits us. For example, cuts in government spending will most likely lead to massive layoffs of workers in relevant industries, lower wage levels and, ultimately, lower production volumes. All this is the inevitable consequence of cost reduction.
In addition to government spending, the state of the economy is affected by such a powerful factor as interest rates. The decision of the government to raise the interest rate leads to lower costs, which may cause a recession to begin. The decision to lower the interest rate leads, as a rule, to higher costs, which can serve as a factor contributing to the recovery of the economy.
Another school of economic thought categorically disagrees with the statement that the onset of certain stages of the business cycle is due to changes in government policy or in the level of government spending. This group of theoretical economists believes that the main forces that determine the occurrence of certain stages of the business cycle are differences in productivity levels and changes in consumer tastes and preferences. Economists who adhere to this point of view believe that only companies and consumers can condition the change in the stages of the business cycle. These economists believe that the onset of certain stages of the business cycle does not depend on changes in monetary and other policies initiated by the state.
It is not so important which of the two points of view impresses you more. As a trader, it is important for you as soon as possible to identify signs of a recession or the beginning of a recovery in the economy. The stages corresponding to the peak and the bottom are periods of relative stability, i.e. periods when the state of the economy remains stable and has not yet begun to change in one direction or another.These stages are almost impossible to detect before several months after their completion. As a trader, you can identify changes in shopping and spending behavior by tracking various economic indicators. By tracking these indicators, you can determine the initial length of time at which the economy enters a stage of recession or recovery or is completely stabilized.
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