What Is the Trough in the Business Cycle?

Recessionary Trough Explained in Less Than Three Minutes

Definition
A trough in the business cycle is a period of negative gross domestic product (GDP) that forms the lowest point in an economic cycle. It indicates that a recession is underway.
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A trough in the business cycle is a period of negative gross domestic product (GDP) that forms the lowest point in an economic cycle. It indicates that a recession is underway. Although some analysts claim that a trough in the business cycle occurs with two quarters of negative GDP growth, that is not the definition used by the economists who determine recessions.

A trough in the business cycle affects almost all investors and business owners. Understanding what economists look for when they analyze economic activity can help you make better decisions.

Definition and Example of a Trough in the Business Cycle

A trough in the business cycle is the point at the bottom of the business cycle where it is clear that a recession is underway. It is identified by a period of decline in different measures of economic activity. Often, but not necessarily, it is formed by two quarters of negative GDP growth. In the U.S., recessions are declared by the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER).

Note

Economists look at different measures of economic activity to see if there is a sustained decline across the economy before declaring the trough of a business cycle. The most recent recessionary trough took place in April 2020, following a peak reached in February of that year. The decline took two months, not two quarters, thanks to the pandemic.


  • Alternate name: recessionary trough

How Does a Trough in the Business Cycle Work?

A trough in the business cycle marks the low point in the economic cycle. It follows a period of decline after the economy hits peak productivity. Employment and output will fall for a time, and the government often steps in to stimulate a recovery. As the economy works through the trough, growth will resume and the cycle will begin again.

Note

The trough is the bottom of the cycle. At that point, the recovery begins and the economy moves toward a new peak. That may happen over a few months or a few years. 

The Great Recession began its decline from a peak in December 2007. The trough was reached in June of 2009, and the next peak didn’t occur until February 2020. In other words, the recession lasted from December 2007 to June 2009, and the recovery continued from June 2009 all the way until February 2020.

What It Means for Individual Investors

During a recession, certain businesses slow down and others pick up. In general, consumers spend less money, and they shift their spending to discount brands and off-price retailers. The market experiences what is known as a sector rotation as investors sell stocks expected to do poorly and move money to those expected to do better.

Key Takeaways

  • A trough in the business cycle is the bottom point of an economic cycle.
  • It is often, but not necessarily, marked by two quarters of negative GDP growth.
  • Employment and output will fall during a recessionary trough.
  • Stocks of companies selling necessities and lower-priced items will generally outperform.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. U.S. Bureau of Economic Analysis. “Recession.” Accessed Dec. 30, 2021.

  2. National Bureau of Economic Research. “Business Cycle Dating.” Accessed Dec. 30, 2021.

  3. National Bureau of Economic Research. “U.S. Business Cycle Expansions and Contractions.” Accessed Dec. 30, 2021.

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