4 Stages Of The Economic Cycle

You may have heard of the National Bureau of Economic Research (NBER); it's the organization that announces a recession has officially ended—three years after the fact. The data may be slow to develop, and a bit dry, but a little digging can provide insight into investment decisions. Here is a list of the four basic stages of the economic cycle, and some associated telltale signs of the economic stages. Keep in mind these usually trail the market cycle by a few months.

This is where things start to go bad for the overall economy. Consumer expectations are at their worst; industrial production is falling; interest rates are at their highest and the yield curve is flat or even inverted. Historically, three  sectors have found favor during these rough times:

• Services (near the beginning)
• Utilities
• Cyclicals and transports (near the end)

(For related reading, see: Industries That Thrive on Recession.)

This is not a good time for businesses or the unemployed. Gross domestic product (GDP) has been retracting quarter over quarter, interest rates are falling, consumer expectations have bottomed and the yield curve is normal. Sectors that have historically profited most in this stage include:

• Cyclicals and transports (near the beginning)
• Technology
• Industrials (near the end)

(For related reading, see: Recession: What Does It Mean for Investors?)

In this stage, things are starting to pick up. Consumer expectations are rising, industrial production is growing, interest rates have bottomed and the yield curve is beginning to get steeper. Historically, successful sectors at this stage include:

• Industrials (near the beginning)
• Basic materials
• Energy (near the end)

(For related reading, see: The 6 Signs of an Economic Recovery.)

In this stage, interest rates can be rising rapidly, with a flattening yield curve. Consumer expectations are beginning to decline and industrial production is flat. Here are the historically profitable sectors in this stage:

• Energy (near the beginning)
• Staples
• Services (near the end)

(For related reading, see: A Flattening Yield Curve Is Good for the Economy and Stocks.)