SIE Ready📈 Economic Factors · Lesson 3 of 5 · 5 min
Boom, Bust and Who Survives
🌊 Economies breathe in and out. Knowing which industries hold their breath best is an SIE favorite.
💡 Key idea
Peak to trough is contraction. NBER makes the official recession call; two negative GDP quarters is only a rule of thumb.
🧠 Why it matters
The BUSINESS CYCLE has four phases: EXPANSION (rising output and jobs), PEAK (the high point), CONTRACTION (falling activity) and TROUGH (the low point before recovery). The NBER, the official U.S. cycle dater, defines a RECESSION as a significant decline in economic activity spread across the economy and lasting more than a few months; it does NOT use a fixed GDP rule. A common RULE OF THUMB is two consecutive quarters of falling real GDP. Industries react differently: CYCLICAL (autos, heavy equipment, construction, steel) swing hard with the cycle; DEFENSIVE (utilities, food, household staples, healthcare) hold up because people keep buying them; GROWTH companies grow faster than the economy almost regardless of phase.
📈 In the real world
Luis, a new rep, reviews two sample portfolios during a slowdown. The one heavy in car makers and homebuilders fell sharply; the one built on utilities and grocery chains barely moved. His manager sums it up: people delay a new car, but they still pay the electric bill and buy toothpaste.
📌 Takeaways
- Expansion, peak, contraction, trough
- NBER: significant, widespread decline lasting more than a few months
- Cyclicals swing with the economy; defensives (utilities, staples) resist downturns
📖 Terms in this lesson
Business cycle: The recurring pattern of expansion, peak, contraction and trough in economic activity.
Recession: A significant, widespread decline in economic activity; the NBER dates US recessions, and two straight quarters of falling GDP is a common rule of thumb.
Defensive industry: A business selling necessities, such as utilities, food or health care, whose earnings hold up relatively well in a downturn.
E-P-C-T (business cycle): Expansion, Peak, Contraction, Trough: the four phases of the business cycle, in order.
✅ Test yourself
Which industry is generally considered defensive?
- Electric utilities
- Residential construction
- Steel production
- Automobile manufacturing
Answer: A · Electric utilities
Demand for electricity stays steady in good and bad times, making utilities defensive. Autos, homebuilding and steel are classic cyclicals that rise and fall with the economy.
The organization that officially dates U.S. recessions is the:
- National Bureau of Economic Research
- Federal Reserve Board
- Bureau of Labor Statistics
- Securities and Exchange Commission
Answer: A · National Bureau of Economic Research
The NBER's Business Cycle Dating Committee determines peaks and troughs. The Fed sets monetary policy, the BLS publishes jobs and price data, and the SEC regulates securities.
The phase of the business cycle that immediately follows a peak is:
- Recovery
- Contraction
- Trough
- Expansion
Answer: B · Contraction
After the peak, activity declines: contraction. The trough is the low point at the end of a contraction, and expansion or recovery follows the trough.
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