The Retirement Corporation of America

To Understand the Economy, Get a Calendar

THE SEASONS FOLLOW each other--spring, summer, fall and winter--year after year. We know that and make plans for it. We put the snow tires on when winter approaches, plant our gardens in the spring, head for the swimming pool in the summer and prepare to rake leaves in the fall.

Well, now you know that the economy also has its seasons--contraction following expansion followed by renewed expansion. Once you understand how those economic seasons work, you can anticipate them and make plans for them as well. Let's put the business cycle--expansion followed by recession followed by expansion--onto a calendar to make it easier to understand. Here's how those economic seasons would work.

Economic Spring--All is perfection. The economic expansion is in full swing. The economy is growing, jobs are becoming more plentiful, corporate profits are on the rise and the stock market is gaining. Your income is increasing, so you can afford to buy more things--with enough left to add to your savings.

Because everything in the economy is nicely in balance, inflation is low. Without inflation, there is nothing to push interest rates up. If you want to buy a better home, you can get a mortgage at a pretty reasonable interest rate.

Because we're in an economic spring, you are making excellent progress toward mastering your financial future. You have made plans and your progress toward achieving those plans is excellent.

Economic Summer--Heat wave ahead. The economy continues to expand. Corporate profits continue to gain. So does your income. There are plenty of jobs around--in some cases, more jobs than qualified people to fill them. Businesses must pay more to hire the people they want. Demand is strong for everything from cars to candy bars. To meet demand, companies start bringing their older, less-efficient facilities back to life. Lots of money keeps pouring into the stock market--so much money, in fact, that some pretty weird stocks get bid up to pretty high prices.

The economy looks healthy, but strains are appearing. With payrolls climbing and the cost of meeting demand going up, businesses start raising their prices. Inflation starts to creep higher. So do interest rates. Suddenly it's harder to find a mortgage at a rate you want to pay.

Because we're in an economic summer, you still are making excellent progress toward mastering your financial future. Your progress toward realizing your financial plans still is very good. Yet there are a few problems showing up. Prices are going up for lots of things so you aren't saving as much as you had been. And those high mortgage rates are keeping you from buying your dream home.

Economic Autumn--There's a chill in the air. Suddenly the economy isn't expanding as it had been. Higher costs have cut into corporate earnings and businesses aren't hiring as they had been. Your last raise at work was smaller than you hoped for. Meanwhile, prices keep going up on everything you buy--forcing you to buy less and making it harder and harder for you to save anything. Mostly the stock market has stopped climbing. Only a few stocks continue to gain and most of those are high-risk, new-technology issues that aren't really suited for you at all.

With costs and wages both higher, inflation is racing ahead. You must keep cutting back to stay within your budget. You keep the old car going for another year and decide to wear last year's winter coat for another season. Mortgage rates are so high that you simply give up plans to buy a new home.

Because it is an economic autumn, progress toward mastering your financial future has slowed. You can't save much and those stocks you have invested in aren't producing the gains you hoped for. You still have those financial plans you made, but you begin to wonder if you will ever achieve them.

Economic Winter--Things are looking bleak. Now the economy isn't expanding at all, but contracting. Jobs are hard to find and prospects of getting a raise aren't good. In fact, your income is down a little because there's no overtime, so you really have to watch your spending. Even so, you still have to cut back on your saving. Other people are doing the same, so businesses aren't selling as much as they had been. That has really cut into corporate profits. Without corporate profits to sustain them, stock prices are skidding.

Everything looks grim, yet beneath the surface there are signs of life. With demand down, not only aren't businesses raising prices, they are actually cutting prices to stimulate sales. Even with your income down, you still find that your budget again buys more. With inflation waning, interest rates are down. Suddenly, mortgage rates are back to where you can afford them. With stock prices down, you find some issues you liked that are a lot cheaper than they used to be.

Because it is an economic winter, progress toward mastering your financial future has resumed. Your money goes further, so you can save a little more. Stock prices are cheap so you can buy high-quality stocks at bargain prices. Not only are mortgage rates lower, but so is the latest asking prices for that home of your dreams. Now you can afford to buy it. Suddenly it looks as if you will achieve those financial plans of yours. And because millions and millions of consumers think and act just the way you do, economic winter is about to end and economic spring is just about to arrive.

Reading the Economic Calendar

That's what the business cycle is all about—that swing from expansion to recession to expansion, that swing from economic spring, through economic summer, economic autumn, economic winter and back to economic spring again.

It takes 365 days for our calendar to make it through all four seasons. Based on all the business cycles that have occurred since they started keeping records in 1854, each trip through the economic calendar takes about four-and-a-half years—around 1,640 days.

Some cycles are longer. The cycle that began early in 1991 lasted nearly 4,000 days. Some are shorter: We had a complete economic cycle back in 1919 that lasted only 10 months—a complete economic "year" in less than one calendar year.

Cycles are getting longer. The average cycle since World War II has lasted more than 1,800 days. That could be because we are getting better at controlling our economy. It could be because we are working harder and more efficiently. It could be just plain dumb luck.

There is simply no telling how long cycles will last in the future. You can't make your financial plans completely confident that you can call each change in the economic seasons before it happens. You can, however, make those plans absolutely confident with these Four Rules You Can Count on When It Comes to the Economy:

Rule #1: There will always be business cycles. We may get better at forecasting the economy and computer technology may change everything about how we live and work. Even so, economic policymakers are only human and will inevitably make human errors. And there will always be the unexpected—war, drought, floods, technological breakthroughs—to undo everyone's plans, no matter how carefully they were thought out.

Rule #2: There will always be recessions.
They don't happen as often as they used to and they aren't as severe as they used to be. But as long as there is a business cycle, there will always be recessions—sometimes touching just sectors of the economy, sometimes touching the whole economy. Expect them—regard them as rainy days you must get through and don't let them get you down.

Rule #3: The boom years will always outnumber the bust years.
That's how it has been for nearly 150 years—four good years for every down year, four years of expansion for every year of recession. Based on recent history, we seem to be doing better than that. The 21st Century could bring five or six or seven years of expansion for every year of recession.

Rule #4: Plan for the best since the best is most likely to happen. We live in a growing economy—one that delivers many years of expansion for every year of recession. That's been the case for 150 years and the expansion years have been pulling further ahead of recession years in the past 30 and 40 years. So, make brave financial plans for the future. Take risks by investing your savings in stocks because all that vigor in our economy brings those risks down to manageable proportions. Dream grand dreams for your financial future. There is no 100% certainty you will get to live all those dreams. But based on history that goes back to the early years of our country, the odds are overwhelmingly in your favor.