On the Road: The Four Phases of the Business Cycle

  • by ITR Economics - Fri, 05/25/2018 - 10:58
Business Cycles

At ITR Economics, we divide the business cycle into four phases. Knowing where you are in the business cycle can enable your company to make optimal decisions for a given economic climate and best prepare for what’s coming next.

The four phases are:

  • •Phase A: Recovery – During this phase of the business cycle, activity is below the year-ago level, but the 12/12 rate-of-change is rising. Pessimism prevails during Phase A; but if you know that the rate-of-change analysis signals positive economic momentum, your business can take advantage of the gloomy economic atmosphere. Consider opportunistic capital or business acquisitions while valuations are low. Increased sales and marketing efforts during this phase will give you a head start against the competition for the coming economic upturn. Above all, ensure that you have the workforce and available capacity to meet demand during the coming accelerating growth trend.

  • •Phase B: Accelerating Growth – Phase B represents the best phase of the business cycle: when the 12/12 rate-of-change is above zero and rising. During this phase, activity is expanding at an accelerating pace. Take actions that will extend the rising trend for as long as possible, as well as build brand loyalty and customer satisfaction. Phase B is a great time to invest in your workforce through training programs and additional hiring. And if you’re looking for an exit ramp, a high degree of economic confidence can make Phase B the best time to sell a company.

  • •Phase C: Slowing Growth – This phase can be the most treacherous to navigate, as activity is still rising on a year-over-year basis, but the 12/12 rate-of-change is declining. During Phase C, it is easy to be swept along by the optimism that remains predominant throughout the economy. However, it is more important than ever to exercise caution and avoid overextending as your business moves along the back side of the business cycle. Cash is king during Phase C. Careful balance sheet management will enable you to avoid the worst of the coming slowdown. Carefully consider your workforce needs and avoid committing to long-term expenses at the top of the price cycle.

  • •Phase D: Recession – During the final phase of the business cycle, activity is contracting and the 12/12 rate-of-change is declining. Even during this phase, it is possible to remain profitable and to set your business up for success during the next upswing. Phase D may entail cost-cutting measures. Consider amending your advertising plans and credit policies. Consider your equipment needs and marketing, hiring, and training plans for the next cycle. It is especially important to lead with confidence during this phase and share good news early. Many younger employees have not experienced a recession during their career and will follow management’s lead – whether that means maintaining strong morale or panicking. Be ready to move into Phase A with conviction when warranted by your rate-of-change and leading indicator analysis.

It is important to note that you may not move through the four phases sequentially or evenly. A business may rise in Phase B, slip into Phase C and then move back up into Phase B again. Noting which phase is next sets the stage for the proper strategic and tactical decisions. Please also note that the duration of each phase can be very different depending on the general economic climate. You may end a long Phase B rising trend with a quick and short decline in Phase C that culminates in a Phase D situation just three months after Phase C began. The use of leading indicators is key in the planning process and determining the upcoming economic landscape.

Lauren Saidel-Baker, CFA