Business Growth Secrets that Nobody Tells You
 

If you are in business, then it always going to be about the economy. More than the economy, it is really about always deploying the fundamentals while understanding what cycle of the economy you are in, and which cycle is coming up.

Four phases of an economic cycle

Although there are numerous theories explaining what causes economic cycles, most generally agree on the four phases: expansion, peak, contraction, and recovery.

Phase 1: Expansion. During the expansion phase, interest rates are often on the low side, making it easier for consumers and businesses to borrow money. The demand for consumer goods is growing, and businesses begin ramping up production to meet consumer demand. To increase production, businesses hire more workers or invest capital to expand their physical infrastructure and operations. Generally, corporate profits begin to rise along with stock prices. Gross domestic product (GDP) also begins rising as the economy gets its “boom” cycle underway.

Phase 2: Peak. At this stage, the economy reaches a maximum rate of growth. As consumer demand rises, there’s a point at which businesses may no longer be able to ramp up production and supply to match the increasing demand. Some companies may find it necessary to expand production capabilities, which entails more spending or investment. Businesses may also begin experiencing a rise in production costs (including wages), prompting some to transfer these costs over to the consumer via higher prices.

Consequently, businesses may begin to see a “topping-off” in profits despite charging higher prices. Other businesses will see decreasing profits due to higher manufacturing (input) costs or higher wage demands. Overall, inflationary pressures start to build up, or “bubble,” and the economy begins to overheat.

Typically, the Federal Reserve will hike interest rates to combat rising prices—making it more expensive to borrow money—in an attempt to cool the economy.

Phase 3: Contraction. Then the economic contraction begins. In this stage, corporate profits and consumer spending, particularly on discretionary (e.g., luxury) items, begins to fall. Stock values also decline as investors move their investments to “safer” assets such as Treasury bonds and other fixed-income assets, plus good ole cash. GDP contracts due to the decrease in spending. Production slows to match falling demand. Employment and income can also decline as businesses temporarily freeze hiring or resort to laying off workers. Overall, economic activity slows, stocks enter a bear market, and a recession typically follows.

Sometimes a recession is mild, but other contractions—such as the Great Depression—are particularly severe and long-lasting. In a depression, many businesses close up shop for good.

If the economy looks to be suffering a severe contraction, the Federal Reserve tends to lower interest rates so that consumers and businesses can borrow money on the cheap for spending and investment. Lawmakers may tweak tax policy and/or call on the Treasury Department to issue economic stimulus in order to stoke consumer spending and demand for goods and services.

Phase 4: Recovery. The recovery phase is when the economy hits its trough, bottoms out, and begins the cycle anew. Policies enacted during the contraction phase begin to bear fruit. Businesses that retrenched during the contraction begin to ramp up again. Stock values tend to rise as investors see greater potential returns in stocks than bonds. Production ramps up to meet rising consumer demand and with it, business expansion, employment, income, and GDP.

Now that you understand the four phases of the economy you need to use that to your advantage. Which phase do you think we are in now? Iran attacked Israel over the weekend, and I paid $4.00/gallon for gas. Do you know what that implies? Will you take different steps with your finances?

Let me tell you what it means. Gas prices will rise either for the short-term (let's hope) or the long-term because of the unrest in the Middle East. So what you say, I drive an electric car. Well higher gas prices affect everything.

1. Air travel rises because of fuel costs
2. If air travel rises too much people don't travel as much
3. If people don't travel as much, hotels, restaurants and all travel related industries slow down...but wait there is more...
4. Carpets are made from petroleum, so those prices rise. If they rise enough people don't buy and the industries slow and have to let people go.

I can give you $10,000 more examples but I think you get the idea.

Practical steps:

1. Anything that your business needs that is petroleum related-stock up on
2. Lock in travel tickets now.
3. Fill you car up asap
4. Re-evaluate your portfolio and maybe thin the areas that have exposure to the present cycle.

These are the things that we teach our clients. How to be secure in any and all phases of the economy. 

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In Gratitude,

Paul