Trough (Business Cycle)

A trough is the low point in the business cycle where economic activity stops declining and begins to recover. It marks the end of a contraction (recession) and the transition into recovery and expansion.

Key takeaways

• A trough signals the bottom of economic activity or prices before a rise.
• It follows a contraction and precedes recovery and expansion.
• Common indicators include GDP, unemployment, wages, business sales, credit availability, and stock market performance.
• Troughs are usually identifiable only in hindsight.

How a trough is identified

Economists track several indicators to determine where the economy stands in the cycle:

• Gross Domestic Product (GDP): A trough occurs when GDP stops falling and begins to rise.
• Unemployment: Rising unemployment signals contraction; when unemployment levels stop rising and begin to fall, a trough has likely occurred.
• Income and wages: These decline during contraction and bottom out at the trough before increasing in recovery.
• Business sales and earnings: Declining during contraction and bottoming at the trough.
• Credit availability: Tight credit typically accompanies troughs.
• Financial markets: Stock-market rallies after severe declines can signal that a trough is in place or approaching.

Note: Because many indicators are revised and lag economic activity, the exact timing of a trough is often confirmed only after data are available.

Characteristics and variations

• Severity varies: troughs can be mild and short-lived or deep and prolonged.
• Typical signs during a trough include higher unemployment, layoffs, falling business revenues, low credit availability, and some business closures.
• In financial trading, “swing lows” in asset prices are often referred to as troughs, with “swing highs” called peaks.

Historical U.S. examples

• Great Recession (June 2009): GDP peaked in December 2007 at about $14.99 trillion, declined through 2008–2009, and bottomed around $14.36 trillion in June 2009. Expansion followed, with GDP surpassing the 2007 level by 2011.
• Early 1990s recession (March 1991): GDP fell from about $8.98 trillion in July 1990 to roughly $8.87 trillion by March 1991, then recovered and exceeded $9 trillion later that year.

Brief FAQ

Q: When does a trough occur?
A: A trough occurs when a recession ends and economic measures (output, employment, income, sales) begin to rise.

Q: What are the stages of the business cycle?
A: Commonly described stages are expansion, peak, contraction (recession), trough, and recovery/expansion.

Q: What’s the difference between a trough and a peak?
A: A trough is the cycle’s lowest point before recovery begins; a peak is the highest point before contraction starts.

Q: How severe can troughs be?
A: Severity ranges from mild recessions to deep, prolonged downturns (depressions). A common definition of a recession is negative GDP growth for two consecutive quarters; a depression is an unusually severe, long-lasting downturn.