Trough

Trough Definition

Trough is the lowest point in a business cycle, from where the business only moves forward to expansion, which is the first phase of the cycle. A trough also marks the shift of business from recession to recovery phase and finally moving towards expansion. In some ways, it also signifies the last stage of the cycle before it revives.

There are a total of four main stages of any business or economic cycle that reflect the financial and market stability of a company or nation. From an economic perspective, it is defined as two consecutive negative quarters. It is a challenging phase, and most of the market aspects decline during this period.

• The trough is defined as the bottom and lowest point of a company. In an economy, it is two consecutive negative quarters of GDP growth and declining factors.
• There are a total of four phases in a business cycle: expansion, peak, contraction, and trough. It also marks the end or completion of a business cycle.
• During the trough phase, the unemployment rate increases, there are no market activities, negative cash flow, high inflation, and fewer investments and projects.
• When an economy reaches a trough, the government comes forward to introduce strong policies and new systems to bring back the falling economy and stabilize it.

Trough In Business Cycle Explained

The trough in the business cycle represents the downside of the economy, with a declining gross domestic product (GDP) and falling market activities. It is the bottom endpoint of the cycle and, therefore, always marks both its completion and a new beginning. In theory, economic growth can only recover from this point, moving upward first to reach the neutral point and then heading towards the expansion stage once again.

To put it simply, there are four core stages of a business or economic cycle: expansion, peak, contraction, and trough. The third stage of contraction has two parts: recession and depression. Only after an economy has reached and suffered a brief period of depression is the trough point realized, specifically when there have been two consecutive negative GDP quarters. The economy works its way up, but first comes the recovery phase, which leads to resuming the cycle from the expansion phase again. This whole journey elaborates on the fact that there are technically six phases in a business cycle.

A trough in economics can be said to be the lowest point of recession and depression, where unemployment increases, general consumers lose faith in the economy, and they spend less, which therefore means market cash flow gets disrupted. The stock market does not perform as well. It is at this stage that the government comes in to initiate policies to stimulate a recovery.

Examples

Let us take a quick look at some examples to understand the concept better:

Example #1

For a hypothetical example, assume a fictitious town. When the town was established, everyone from nearby villages came to settle, work, and do business here. It was the expansion phase; there were new shops, new markets, construction, high investments, and local government projects going on. It went on for multiple quarters consecutively, and the town's cycle reached the peak phase.

But slowly, as the population grew, the youth started leaving the town for metropolitan cities and foreign countries for education and work. A recession was realized in its economy. The phase continues, and recession turns into depression, reaching the brief phase of the trough. It is the lowest point the town has experienced. Old and retired people mostly occupy the whole town. There are no jobs, no new projects, or investments going on. The town has no market activity or business operations going on.

It is a simple trough phase example. In reality, many small countries and underdeveloped economies face this in their economic cycle. Although the economies often recover and move towards a phase of recovery and expansion again.

Example #2

According to a Business Insider article, Evercore, which is a global investment and banking advisory firm, suggests that a peak-to-trough decline of approximately 17% can be expected at any time during 2024. Evercore's equity strategy chief says it. He believes that this will likely come amid a mild recession and disappointing corporate earnings. The stock market experts have already warned of a recession risk months ago, given the aggressive hike in federal interest rates in 2023, which were introduced to regulate inflation.

A trough period is anticipated as the markets are expecting five to six rate reductions from central bankers, but this could also fire back on stocks. The Evercore chief also pointed out that in any given non-recession year, there was a 13% variation from peak to trough in stocks. Apart from this, other sources have warned of a challenging year for the stock market, with a constant recession risk running parallel. One of the market bears also predicted that the S&P 500 might drop by up to 65%. In that case, the US economy will have to suffer a brief trough phase.

Graph

In this graph, the x-axis represents time, and the y-axis signifies the level or height of the phase. Now, the business cycle starts from the expansion phase with an upward curve reaching the second phase of the peak. Both of these phases reflect positive economic growth, high investments, booming market activities, and increased employment. From the point of peak, the cycle declines, moving downward to the neutral x-axis line going in the negative range, touching the phase of the trough.

This phase is the contraction phase, which includes both recession and depression. It symbolizes the fall of the economy with negative cash flow, increased unemployment, and fewer market activities, basically the opposite of the expansion and peak phase. From trough, eventually, the economy survives with the help of government intervention and policy-making. It enters the recovery phase, reaching the neutral x-axis point, from where the expansion process starts again. However, depending on the market factors, government policies, and resistance, the periods of any of these phases can be short or large.

Trough vs Peak

The main differences between trough and peak are as follows:

Trough	Peak
It is the lowest point of the business cycle.	Peak is the highest point in a business cycle.
This phase lies in a negative aspect and reflects the declining phase of an economic or business cycle.	It showcases the outright positive growth and booming economy and market activities.
The market is facing a financial crisis with negative GDP phases.	In this, people are spending more, and the GDP growth is positive.
In this phase, the unemployment rate increases.	The employment rate increases, and people are more at work.

Frequently Asked Questions (FAQs)

Recommended Articles

This article has been a guide to what is Trough and its definition. Here, we explain the concept along with a graph, differences with peak, and examples. You may also find some useful articles here –

• Business Life Cycle
• Business Expansion
• Boom and Bust Cycles