Recognizing the Signs of an Economic Recovery

Dec 20, 2009
Selena Robinson

Expansion is generally used to refer to a prolonged period of economic growth. A country is said to be experiencing expansion during the time between a downturn and stabilization, or what’s commonly called a “boom”. For an economy to be experiencing genuine expansion, the economic growth must be sustained for a considerable time. A mere spike in growth will not qualify as expansion, since countries go through regular cycles of decline and recovery. According to Investopedia, periods of expansion can last anywhere from a few months to ten years, but tend to average three to four years in length.

There are clear signs when a country is experiencing expansion. Some of the signals of an economic recovery are an increase in the amount of national resources (natural, labor, government and technological), increased trade levels with other countries and overall national stability.

Investor Words states that expansion is also marked by a rise in a nation’s gross domestic product (GDP), which measures the amount of goods and services produced. The GDP is divided into the nation’s population to calculate rate per capita, that is, the amount of gross domestic product per citizen of the country. When these numbers increase for a regular interval, a nation can be said to be in expansion. For a nation to be in a period of monetary expansion, the rate per capita must be positive after appropriate adjustments for inflation.

Since the rate per capita does not reflect real benefits received by citizens, expansion can only refer to a nation’s overall economic status, not to the actual standard of living for all residents. In fact, at the end of a period of expansion, the gap between rich and poor is usually wider, since the increase in the country’s gross domestic product generally benefits the wealthiest citizens most.

A sharp increase in business activity is also seen during a period of expansion. Large companies usually increase the size of their operations and workforce. Smaller companies and startups may “go public”, that is, begin trading on the stock exchange. Mortgage lending goes up, thanks to improved employee wages and the increased real estate activity causes existing home values to rise. This played out during the mid 2000s right before the housing bubble burst.

Just as it’s clear when a country is growing, it’s equally clear when expansion is slowing down. An early indicator is a reduction in GDP. When fewer goods are being produced, it may point to an impending market plateau. As reported in Time magazine, a slowdown in GDP can lead to falling stock prices. As markets taper off, consumer confidence and spending may decline. When this occurs, the government’s central bank might choose to increase interest rates in an effort to jumpstart spending. All of these signs point to the end of a period of economic growth.