What Is an Economic Recovery?

Economic Recoveries Explained

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An economic recovery is the phase of the business cycle that follows a recession. During a recovery, employment rates often improve, consumers usually are more willing to spend money, and businesses may invest in expansion efforts.

For most people and businesses, an economic recovery is positive. However, it could have negative effects on others. Understanding how an economic recovery works and whom it affects may help you make better spending, saving, and investing decisions.

Definition and Examples of an Economic Recovery

Economic recovery is the part of the business cycle where the economy starts to expand after a recession. People may begin to spend more money again and businesses may have room for growth.

  • Alternate name: Economic expansion

In the United States, periods of economic recovery and recession are measured by the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee, a group of economists who analyze data to mark the beginning and end of recessions. It looks at several factors, such as personal income, employment, personal consumption expenditures, and industrial production.

Despite what many people may think, there are no hard and fast rules that say two consecutive quarters of declining gross domestic product (GDP) equal the start of a recession, or that two consecutive quarters of GDP growth equal an economic recovery.

NBER data goes back to 1857. It records the dates for when the economy peaks and troughs, as well as the periods between troughs and peaks, showing any recovery. For example, NBER data shows that the U.S. was at a peak in February 2020. The stock market hit highs and the unemployment rate was at a low. Then the 2020 recession set in for two months. The trough occurred in April 2020; the stock market was down and the unemployment rate was high. After the recession, the U.S. entered the phase of economic recovery. Employment increased, consumers began spending more money, and the stock market recovered its losses.

Before 2020, there was another economic recovery in the U.S. that happened following the Great Recession of 2007-2009. A trough occurred in June 2009, marking the end of a recession caused by the financial crisis. The economic recovery that followed continued for almost 11 years before hitting its peak in February 2020.

How Does an Economic Recovery Work?

Many economists have worked on measuring and understanding the business cycle, which includes economic recoveries. One of the modern ideas of business cycles is based on work done by economist and author Joseph Alois Schumpeter. Before he died in 1950, Schumpeter published his book “Business Cycles” in which he explained this view: The economy builds up to a peak, in which everything becomes overheated. Workers are paid beyond their productivity and investments become increasingly speculative. Eventually, a crisis event occurs, marking the start of a recession.

For example, in 2020, the COVID-19 pandemic is what caused unemployment to increase and spending to decrease in the U.S. Back in 2007, the event that set off the Great Recession was the financial crisis.

During recessions, the economy declines until it reaches a trough. Only after that trough is an economic recovery seen.

Over time, economists, politicians, and managers have gotten better at managing economic expansion so that it may continue for a long period. Still, the good times are likely to end at some point—that’s the cycle. Some recessions are mild and last only a few months, while others may persist for years.

What It Means for Individual Investors

Most businesses do better when the economy is expanding. After all, if there are more jobs and higher incomes available, people will probably have more money to spend on goods and services.

Some businesses may be more successful during an economic contraction. They may actually benefit from lower labor costs and lower prices, the latter potentially driving an increase in sales from customers who could not afford their products before the recession.

Investments that do better when the economy heats up but worse when the economy slows are known as cyclical investments. Most consumer and retail businesses fall into this category, along with travel companies, automakers, appliance manufacturers, and homebuilders. Investors may find success with these types of investments during an economic recovery.

The opposite of a cyclical investment is a defensive investment, which often does better during a recession. This includes makers and sellers of food, tobacco, alcohol, and personal care items. It also includes such things as education and training, because people who are unemployed may use that time to prepare for a better job.

Interest rates are also affected by recessions and economic recoveries. In general, the Federal Reserve works to reduce interest rates during a recession and increase interest rates during an economic recovery. For example, interest rates on high-yield savings accounts or certificates of deposit (CDs) may be low during a recession, but may rise during an economic recovery, making them safer places to deposit money.

Key Takeaways

  • An economic recovery is a period of growth that follows a recession. It could last a few months or several years.
  • Economic expansion and contraction are normal parts of the business cycle, which lead to recessions and recoveries.
  • The National Bureau of Economic Research (NBER) Business Cycle Dating Committee evaluates and records economic data to document all recessions and recoveries in the U.S.
  • Investors could potentially benefit from economic recoveries by investing in cyclical stocks, which tend to follow the business cycle and perform better when the economy is recovering and growing.