Trough
What is Trough?
The trough is the lowest point of economic activity in a business cycle.
The trough represents the end of a contraction and the beginning of an expansion. At the trough, an economy's real GDP stops decreasing and starts to increase. Unemployment is high, and inflation is typically low.
Trough: a worked example
Track quarterly real GDP for one hypothetical economy: Q1 $820 billion, Q2 $808 billion, Q3 $792 billion, Q4 $786 billion, Q5 $794 billion, Q6 $808 billion. The peak is Q1 and the trough is Q4, because $786 billion is the lowest level and output rises afterward. The peak-to-trough decline is $820 billion minus $786 billion, or $34 billion, which is 34 ÷ 820 = 4.1 percent of the peak. Notice that the steepest single-quarter fall, $16 billion between Q2 and Q3, lands a full quarter before the trough itself. The contraction runs from the Q1 peak to the Q4 trough, and the expansion begins in Q5. Unemployment in this economy peaks at 8.4 percent in Q5, one quarter after output turns up, because firms restore hours for existing staff before they hire.
The mistake students make with trough
Students often mark the trough at the steepest part of the downturn, the quarter with the biggest drop in output, because that quarter feels like the worst moment. The trough is the lowest level of real GDP, which arrives after the decline has already slowed, so in the series above it falls in Q4 rather than Q3. A second slip is treating the trough as the point where the economy is back at potential. Output sits furthest below full employment there, so the recessionary gap is at its widest and closes only well into the expansion.
Trough questions
What happens to unemployment at the trough of the business cycle?
Unemployment sits at or near its cyclical high at the trough. Cyclical unemployment is largest when output is furthest below potential, so the actual unemployment rate exceeds the natural rate. Employment also lags the turn in production, since firms first restore hours for existing staff before hiring, so the unemployment rate can keep climbing for a quarter or two after real GDP has started to recover.
Is a trough the same thing as a recession?
A trough is a single point in time, while a recession is the whole stretch of falling output leading up to it. The recession runs from the peak down to the trough, and the trough is the moment the decline stops and expansion begins. Describing an economy as sitting in a trough for several quarters mixes up a turning point with a phase of the cycle.
What happens to inflation at a trough?
Inflation is usually low at a trough. Weak spending leaves firms with unsold inventory and idle capacity, so they have little room to raise prices, and slack in the labor market holds wage growth down. In a deep enough contraction the price level can fall outright. Once the expansion is underway and spending recovers, upward pressure on prices returns.
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