The business cycle is a critical and fundamental element of macroeconomics. It is the basis of many economic decisions and the primary focus of articles or pieces in print media, radio, television, and the Internet. The term “business cycle” is ubiquitous and gets millions of hits when searched on Google. Even with all this interest and debate, the business cycle is still misunderstood. However, if you want to be successful in the personal and professional aspects of your financial life, you need to understand the business cycle.
The business cycle is reflected in the price deviations from the mean of wholesale prices (Inflation), stock prices (The Stock Market), and housing prices (Real Estate). Dewey and Dakin in their book, Cycles: The Science of Prediction, show how wholesale prices (the 54-year Kondratieff Long Wave Inflation cycle) have deviations from the mean that repeat in nine-year patterns. They also show how common stock prices (the 36-year stock market cycle) have deviations from the mean that repeat in nine-year patterns. This shows that the underlying wave of activity in the other cycles is the business cycle, and that the business cycle is fundamental and provides a "heartbeat" of sorts to the other cycles.
The question is not whether or not the business cycle exists, but rather, what is the length and periodicity of this cycle? Definitions and debates abound regarding the length of the business cycle and its predictability. The point is not to get caught up in the specifics and details of the current cycle, but to step back and look at the forest – not the trees – to get the big picture of what is going on and how that can help you with your decision making. You should also think about how the other cycles interact with each other, and account for the multiplier effect if the other cycles are in or out of phase with each other. With that information, you can make informed decisions that will keep you on track for your goals and maintain your plans for the future.