The Recovery stage is a short period when activity begins to turn up and markets and the authorities gradually recognize that the recession is over. Unemployment is still very high and often still rising, businesses are still failing in large numbers and people are typically still gloomy. But activity is confirmed as expanding again and the worst fears of the recession are beginning to ease.

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The Early Upswing stage sees a virtuous circle of increasing confidence and rising spending. Consumers are increasingly prepared to borrow and spend while business, facing increased demand and increasing capacity use, starts to raise employment and boost investment. Higher confidence pushes up asset prices which, alongside the stronger labour market, encourages consumer spending. Pent-up demand is a key driving force while, typically, monetary policy remains loose. The yield curve is steep. Meanwhile vulnerability to a downturn is typically low at this point and only a huge shock will derail the upswing.

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In the Late Upswing stage confidence increases further, with memories of the last recession receding. Vulnerabilities build as inflation and interest rates trend up and business and consumers take on more risks. Strong confidence among consumers reflects the much tighter labour market, together with strong equity and housing markets. Business investment is robust but profits are under pressure from rising wages.

 

The Peak or Slowdown stage of the cycle can usually be dated to one month or at most one quarter in retrospect but I include it as a stage because, at the time, it unfolds only gradually and takes a while to be confirmed. Moreover, it too involves a process. There is usually a shock involved such as higher oil prices, higher interest rates, a financial collapse, a political shock or some combination. Banks tighten lending criteria. Consumer confidence typically declines abruptly. An inventory correction usually plays a key role.

 

Once the Recession is triggered, it follows a process which typically lasts a few quarters. Cutbacks in business orders and layoffs curtail spending, often feeding back into yet more cutbacks, creating a negative circle of declining spending and confidence. Inventories are a key driver as firms try to pull back on excess stocks. If there is a financial crisis or if the central bank is slow to ease policy, the recession may be deep and prolonged. Absent these exacerbating effects, the processes work through to create a new Recovery phase, usually after 6-12 months or so. In particular the inventory correction eventually reverses, creating a potent stimulus, while the cutbacks on excess and the effects of pent-up demand, as well as government 'automatic stabilisers' gradually begin to provide a floor to spending.

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