With the economy roaring back to full steam and millions of newly vaccinated Americans returning to their lives, business is booming — and that’s not just a figure of speech. On April 9, CNBC reported that the U.S. had officially entered a boom period of economic growth that was expected to exceed pre-pandemic levels and make 2021 the strongest year since 1984.
But what does it mean to experience an economic boom, how long will it last, and are there any downsides?
In America, It’s Boom, Bust, Repeat
During boom times, things are good. A boom represents the top of the business cycle, the very peak of a period of economic expansion. A bust, on the other hand, is the lowest point of a period of economic contraction. There have been more than 30 economic boom and bust cycles since the mid-19th century, and the average boom lasts for nearly 39 months.
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It’s not an abstract concept. Booms are quantifiable. The National Bureau of Economic Research uses indicators like retail sales, industrial production and the unemployment rate to determine when the economy officially enters a boom period.
So, What Happens When the Economy Is Booming?
All kinds of forces combine to steer the business cycle, but boom periods share a few common traits:
- The GDP, which gauges economic output, grows
- Production rises as more goods and services are produced by the same number of workers
- Businesses report higher sales and higher profits
- Unemployment falls as businesses boost hiring to keep up with demand
- Individuals and families have more disposable income
- Stocks enter a bull market
- Bonds, however, enter a bear market
- Booms never last forever and are always followed by a period of contraction
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In a Consumer Economy, Spending Fuels the Fire
Of all the forces just described, fat pockets have the biggest impact. When the economy expands, consumer confidence rises and people spend more money as they become more optimistic about their own prospects.
That increased spending creates greater demand for businesses to produce more goods and provide more services. They respond by hiring more workers, which makes good labor harder to come by for other businesses. Those other businesses then have to raise wages to compete, putting even more dollars into the pockets of more people, who spend even more money, which sends demand edging up even higher.
Inflation Can Quickly Ruin the Party
Rising wages, expanding businesses, falling unemployment, more household wealth and soaring optimism — sounds, great, right?
Yes, until it isn’t.
During the peak of the business cycle at the height of a boom, the economy becomes saturated or “overheated.” When the economy gets too hot, businesses can’t keep up with demand and prices rise as supply wanes. When prices rise, demand drops and so do company profits. Businesses stop hiring, optimism and consumer confidence fall, households tighten their budgets, growth stalls and recession sets in.
Eventually, the economy hits rock bottom, goes bust and the cycle starts all over again.
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Last updated: June 7, 2021