Originally Published: August 9, 2015 1:18 a.m.
The concepts of business cycles, unemployment, and inflation are all interrelated and drive monetary policy out of the Federal Reserve. The easiest way to understand the connectivity among them is to take a look at the business cycle.
There are four phases to the cycle. During a peak when business activity reaches a temporary maximum for output, unemployment is typically low while inflation is high due to the high pace of activity. Following the peak is a recessive period. During this time, there is an aggregate decline in total output, unemployment rises and inflation begins fall with the lack of economic activity. The "trough" is the period after recession but before the economy begins to recover. During this time unemployment is typically at its highest and inflation is at its lowest. As we have witnessed of late, during this period interest rates are held low to help increase money supply and spending. The final phase is expansion, when output begins to rise, unemployment falls, and eventually, inflation rises.
The Federal Reserve historically watches unemployment to determine whether or not to raise interest rates. This recession has been unique in that the usual signals of falling unemployment did not reflect an increase in productivity and further inflation. For this reason, the Fed chose not to raise rates last month. Here in Yavapai County our unemployment rate has fallen to 5.6%, yet our output has remained approximately the same showing no significant rise over the past 3 years. A focus on identifying and assisting with business retention and expansion needs along with entrepreneurial support would suffice as great preparation around the region while waiting for the peak to arrive!
**The Yavapai College Regional Economic Development Center provides analysis and services that facilitate economic development throughout Yavapai County and build wealth in our local communities.