Happy Days, Recession, Depression, Recovery

Depending on how old you are, you have lived through one or more of these stages in the national economy, possibly more than once. The most recent meltdown was perhaps the most memorable since the 1930s. We've all felt the effects of ups and downs in the economy one way or another, but it's often the downs that affect us the most dramatically--whether it's losing our job because our company downsizes or folds, the loss of customers and revenue for the small business owner, or having to purchase a less expensive home to be able to afford the mortgage payments.

But how does all this happen? How does the economy go from great to good to OK to bad to worse and then inch its way up again? If it looks like a cycle, that's because it is.

While there is no line we can draw in the sand that clearly shows when a recession is beginning or that we officially have a booming economy, certain factors are clear indicators of the state of our economy. For example, traditionally, low unemployment rates, high consumer confidence and spending, business startups and expansions, and low interest rates signal a strong economy. At the other end of the spectrum, businesses folding and unemployment rising are strong indicators that the economy is on a downturn.

For example, if we take a look at some fairly recent history of the economy, the time period preceding the year 2000 presidential election was definitely in the boom time category. It doesn't take a financial genius to understand what factors labeled it as such a time. Very low unemployment rates, high consumer spending, and record high returns reached by the stock market had people at just about any economic level feeling secure. By the time the November 2000 presidential election came around, the economy was already showing signs that the horizon wasn't as rosy as it seemed. When the first half of 2001 was over, an economic downturn had been universally acknowledged. The impact of the September 11 terrorist attacks all but ensured that the economy would not recover by the year's end and beyond.

At this point you may be thinking, tell me something I don't know. Well, we can understand the shifts in the economy by examining the cause and effect roles the Federal Reserve, consumer confidence/spending and employment rates each play in shaping the economy.