The fall and winter seasons of the economic cycle
(This is Part III in a four-part series about how understanding economic cycles could inform your financial decisions. Part I is Understanding economic cycles: An introduction. Part II is Recognizing economic seasons: recovery and growth. Part IV is How to profit from economic cycles.)
You will recall from Part II of this short series about economic seasons that the spring of early recovery and the summer growth season resemble the corresponding seasons in nature fairly closely. In this post, we will look at the other two seasons of the economy: fall and winter.
But before we do, it is important to keep in mind that, though the seasons in nature change every three months, the seasons of an economic cycle do not have a fixed length. In terms of economic cycles, a season can last years; and it is difficult to set a calendar to know when the season changes.
As in nature, we have two change seasons (spring and fall) and two main seasons (summer and winter). Last time we looked at one of each. Here are the other two.
Fall — The Season of Harvest
In nature, fall is a pleasant time. As the leaves begin to change color, our activities ramp up. We mark the season with our favorite festivals, holidays, and pastimes like Halloween, Thanksgiving, and football. The cooler temperatures remind us to prepare for the approach of winter: Patio furniture is put away, furnaces are tested, and swimming pools are drained.
Our fictional farmer, Farmer Fred, loves fall too — because it is the season of harvest. It is an exceptionally busy time: All hands are on deck as everyone gets up before dawn and works, works, works late into the night. It is non-stop hustle until the last load is dropped off at the co-op or silo.
It is also the season of payment: Once the crop is delivered, it isn’t long before the check for the year’s crop arrives. It is pretty much the only time Banker Bob sees Fred, who makes sure to deposit those nice checks in person. This is what he has been working for all year. He has enough in the bank for next year’s supplies plus the annual maintenance on all the equipment, and some left over for any unexpected opportunities which may arise.
Farmer Clod, on the other hand, is not as fortunate. He sees the heavily laden trucks as they lumber by … but his crop isn’t ready for harvest yet. He wanted to be sure that winter was over before he started to plant, remember? But he waited too long. His crop is still very green, looking very promising, but there is no harvest.
But then Farmer Clod gets a pleasant surprise: Banker Bob is flush with cash from all those deposits, and he is desperate to make loans — that is the only way he can make money. He calls Clod, who jumps at the opportunity.
Buoyed by a huge loan, Clod goes on a buying spree: new combine, new barns and, while he’s at it, he does a major plow and plant for the next season. Everyone marvels at Clod’s sudden prosperity and they invite him to speak at the Chamber of Commerce. To look the part, he has to lease a Lexus.
Fall in the Economy
Spring and summer in the economy made for an easy mental connection to the seasons of nature, as you saw in the previous article about economic cycles.
However, fall in the economy is quite different. In nature, the temperature drops, warning us of the impending winter. In the economy, the opposite happens — instead of cooling down, the economy gets hotter and hotter. Economists often use the term “an overheated economy” to describe this condition. In other words, it’s like summer, only more so.
What makes it worse is that summer is our favorite season and we want it to continue. Thankfully, summer is the longest of the economic seasons (measured in years). But it is especially hard to see the transition to fall, because it really is “more of the same, only more so.”
The Telltale Signs of Fall in the Economy
If there is one thing that marks fall in the economy, it is rising prices. Home values go up and that makes us feel rich. The quarterly reports we get for our 401(k) plans and IRAs make us feel more secure about our financial future. Rents for homes and apartments go up, just like rent for warehouses and offices. Car prices go up because demand begins to exceed capacity. Cruises are booked up and, consequently, airfare rises too.
Jobs are easier to come by during the fall season in the economy. Overtime is prevalent. Raises, which were like pulling teeth just a short while ago, become the norm again. Bonuses sprout like oranges and promotions accompany expanding headcounts.
Higher prices reflect shortages. To meet the higher demand, construction explodes. New offices, new stores, new plants — virtually everywhere you look, you see construction cranes. Lots which stood empty for years all have construction crews on them — all at top prices. If you are in construction, you understand in winter and spring that the low bid wins, no matter what. In summer, that eases up; but in fall, all you need to do is bid and you have the job. All of your competitors are slammed and your customer is only too happy to get a bid.
Another sign of fall in the economy is rising levels of debt. That is because banks have more money to lend, so they put the squeeze on their sales force to find more loans to sell. In addition, borrowers adopt a mindset that the good times will last forever, so the payments are safe.
Though we may not discern them, bubbles in prices of things like homes, art, collectibles and, of course, the stock market start to form. The zeitgeist in fall is “happy days are here again and they will never end” again.
But unlike in nature, in the fall season of the economic cycle, there is no warning of the shift to the next season.
Winter — The Season of Recession
It is easy to mentally associate the chill of winter with recession; but here, too, there is a significant difference between nature and the economy: The transition in the economy from fall to winter is abrupt. It can happen in as little as a week or two.
The typical scenario is a dramatic stock market crash, after which corporations panic and cut, cut, cut. The raises we enjoyed in the fall were actually rising prices to our employers, so they lay off millions of workers and cut all expansion projects. (Like Farmer Clod, most corporations embark on overpriced expansion plans at exactly the wrong time.) The layoffs ripple through the economy, as workers fall behind and default on payments for cars, homes and credit cards. Governments panic as their revenues from income, sales and property taxes shrink. They freeze raises and hiring, cut overtime, and don’t replace people who leave.
In general, jobs evaporate, home prices drop, and the values of index funds, 401(k) funds and IRAs all drop precipitously. Stores close, banks disappear and the news headlines ooze fear and pessimism. For many people, it’s the pits. But not for everyone.
Some People Love Wintertime
Farmer Fred loves winter — it is his season of rest. His savings account is brimming, work is over, and it is time for Christmas vacation. Last year was Scottsdale; this year, the trip to Barbados is all paid for in cash.
Farmer Clod gets wiped out. All his crops are gone. The bank is under pressure and they call, demanding payment. Clod can’t pay and, a few months later, the bank forecloses.
Fred saw it coming and isn’t surprised to get Banker Bob’s call when he gets back from vacation. All Clod’s assets will be auctioned off on the 15th. Freddy is ready, and he scoops up Clod’s farm for pennies on the dollar, complete with almost-new equipment and barns.
Without a real understanding of the seasons, Farmer Clod is likely to blame global warming, incompetent politicians, corrupt bankers, Wall Street, and the communists for his demise.
Success and the Importance of Timing
It is interesting that Farmer Fred faced exactly the same set of circumstances but prospered anyway. The only difference between the two is that Fred understood when to do what, while Clod did not.
Notice that Fred’s wealth was determined by what he did in the winter and spring, and what he did not do in summer and fall.
Hopefully, you can see that this perspective of the economy involves far more than your investments. It applies to your job, your home, your investments and even your vacations — everything you do with your money. As that ’60s song said, “To everything … there is a season.”
In the next installment, we will wrap it up and see what lessons we can learn from Fred and Clod to maximize what we can get from understanding each of the seasons of the economy.
How do economic events affect your financial decisions? What telltale signs do you notice in different seasons of the economic cycle?
Become A Money Boss And Join 15,000 Others
Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)
There are 17 comments to "The fall and winter seasons of the economic cycle".
This analogy encourages attempts to time the economy, but unlike the seasons the economy does not follow any particular schedule. It can go from “spring” to “winter” and back to “summer”. “Spring” can look exactly like the “indian summer” of fall.
Nor are investments like crops. They are more like trees. You plant them and at some point you cut them down. The longer you let them grow, the more wood you will get. If they are fruit trees you may harvest the fruit and as the tree grows the amount of fruit will increase. But a hard winter may mean lose trees, branches or get no fruit. Predicting a hard winter isn’t like predicting the seasons, its like predicting the weather.
What we actually know is that the market will crash as some point and lose half its value. It will also likely more than restore those losses at some point. That means the current value of our investments is only a rough estimate of the value they will have when we cash them in to spend them.
Using the tree analogy, for the short term invest in hardy trees that may not produce as much but also won’t die and you can predict how much wood they will produce when you cut them down. If you are investing for the long term, invest in those fruit trees that produce more on average, but are subject to the weather.
I like your analogy. Probably because trees are starting to bud where I live 🙂
Ross, I would respectfully differ: the way I see the seasons of the economy, they invariably follow each other: each early recovery (spring) is followed by a summer season of growth. Every summer is followed by the overheating of fall. And every fall is followed by a winter. Take a look at history: every time of “bubbles” (fall) invariably is followed by a recession.
To me that is one of the primary benefits of this view of the cycles: it gives me a good clue of what’s about to come. If the sequence was haphazard, this view would not have nearly the same benefit.
“Take a look at history: every time of “bubbles” (fall) invariably is followed by a recession.”
That is true only in retrospect. There have been market crashes that weren’t followed by a recession. And there have been “double dip” recessions, one recession followed by another.
“To me that is one of the primary benefits of this view of the cycles: it gives me a good clue of what’s about to come.”
To me, that is the dangerous illusion of the idea of cycles. We know the economy will go through periods of growth and retrenchment and the markets will go up and down. Those “cycles” will happen. But we can’t recognize them until after they happen. Today’s economy could be in summer, spring or fall. We know it isn’t “winter” only because it is better than it was and we define “winter” as a time when things are much worse than they were.
I don’t see anywhere in this series that he says to time the stock market. In fact, he is saying that when things look bad, people avoid stocks/real estate/etc. based on fear and that this can be an opportunity to find discounts. When things are running good, you shouldn’t be on a spending spree, but rather preparing yourself for a pending winter. I’m sure more will be cleared up in the next post.
Interesting comparisons between the fall and winter seasons. Very informative and I can see it pays if you can identify these trends. Thanks for sharing William
I love me some good comparison scenarios 🙂
My short-term goal is to reduce dependency on economic changes–or maybe dependency is the wrong word. Impact. I aim to reduce the impact economics has in my life. I understand this might also include reducing the positive effects as well, but I’m okay with that right now.
Of course this might change in the long run if/when I transition to a seasonal work schedule (pun not intended). I currently work in the tourism industry, and just recently in public education, which happens to take place in a tourist-driven organization, so there’s no getting away from that. The hours I work are directly tied to how much money people are spending, how many tours or events or classes they will be booking.
I’m hoping that building a portfolio of rental properties will hedge against a future of inconsistant income. I figure people will always need a place to live, and the first rental property I own is in an area of the city that will not likely ever lack for renters, at least not in my lifetime. But I could be wrong. Taking your farm analogy, you’d figure that basic needs like food and shelter would be safe from most economic crisis, but then there was the housing fiasco and for years now we’ve been hearing about food-growers who are unable to earn enough to sustain their farms, or families. Though I believe there are other variables that have a higher impact on that than economics, such as corporate, government and environmental factors.
I would consider real estate but where I live people are actively getting out of the rental market. With the high rises and new builds, people are selling because they can’t rent their places. The number of places on the market is driving down prices for former rentals, but I can’t help but think it’s not a good time to buy if the demand isn’t there.
“People always need a place to live” but where they live is another story 🙁
The problem with real estate is people think they are making an investment when they are really buying a business. And the rental business can be very unforgiving when things go wrong.
I kept thinking “winter is coming” while reading this article. Too much GoT perhaps?
I am enjoying your posts William. I don’t entirely share your faith in the market, but it’s interesting to read such an in depth discussion on how it all works. Thanks for all the information.
Hahaha same here!Too much of a TV binge for me.
Careful investing is important, but it is scary. That’s why it has to be combined with careful budgeting and savings, and allocating a portion for sound investing.
Another great post. Thanks, William!
Great post, should make people to start thinking about where we are in “seasons” cycle. There is no calendar, but doing research to get better understanding.
Don’t trust and listen to CNBC folks…do your own research, and William’s article should give you some good macro basics.
Bogleheads would disapprove these posts.
Thanks for sharing.
So, this piece begs the question: what season would you say we are in right now?
With the Fed’s just raising the interest rates, does this mean we are now in the fall?