Part 1 · Getting familiar with the economy · Lesson 5
The economy has four seasons too
The economy cycles through recovery, expansion, slowdown and recession. Once you know which season you are in, news and sector moves start to make sense.
QToday's question
Why can't the economy stay good forever? And how can you tell which season of the cycle you are in right now?
Phrases like “fears of an economic slowdown” and “talk of a bottom” show up in the news all the time. That is because the economy has a regular rhythm of upswings and downswings. In this lesson we split that rhythm into four seasons and lay them over the actual waves of the Korean economy.
MAPLearning map for this lesson
We build it up in three steps. At the end of each step, a 'Quick check' lets you test your understanding before moving on.
In Lesson 4 you learned about GDP and the economic growth rate. Remember the growth bars rising and falling year after year? The wave you get by connecting those ups and downs is the topic of this lesson. The earnings knob from Lesson 1 and supply and demand from Lesson 3 come back too. If growth rates still feel fuzzy, feel free to revisit Lesson 4 first.
- STEP 1 · Basic conceptsThe four seasons of the economy
You can tell the four phases of the and its peaks and troughs apart, and explain how output, employment and spending differ in each phase.
- STEP 2 · Understanding the mechanicsWhy waves form and how to measure them
You understand why the economy feeds on itself and then turns, and can read the real economy using the and reference dates.
- STEP 3 · Real-world applicationHow the stock market changes with the seasons
You can confirm with the 2020 case that stock prices move ahead of the economy, and guess which sectors tend to get stronger in each phase.
STEP 1The four seasons of the economy
Connect the growth bars from Lesson 4 and a wave appears. Let's split that wave into four seasons and name them.
The economy keeps repeating upswings and downswings
The is the temperature of all economic activity: production, consumption, investment and employment. That temperature does not move in only one direction. A stretch of growing activity runs for a while and then turns; a stretch of shrinking activity runs for a while, hits bottom and climbs back. This repetition is called the business cycle. The highest point of the wave is the peak, the lowest is the trough, the stretch from trough to peak is the expansion phase, and the stretch from peak to trough is the contraction phase.
Slice it a little finer and you get four seasons: recovery, coming back to life after the trough; expansion, vigorous growth; slowdown, losing speed near the peak; and recession, shrinking activity. The state in which the economy actually moves backward and output and employment visibly fall is called a .
An easy analogy · the economy has four seasons too
In spring the frozen ground thaws and sprouts appear (recovery). In summer everything grows lush (expansion). In autumn you harvest the fruit, but growth starts to stall (slowdown). In winter activity shrinks back and prepares for the next spring (recession). Unlike real seasons, though, the economy's seasons have arbitrary lengths. Summer can last five years, and winter can end in two months. So you have to judge the current season by signals, not by the calendar.
See it in a picture: tap a season
The characteristics and sectors for each phase are a simplified summary of textbook tendencies. The real economy is not this smooth, and sector moves often diverge from it.
The height of the curve shows how hot or cold the economy is relative to its long-term trend. The peak is when activity is liveliest, but it is also when the turn begins. Conversely, the trough is the hardest moment and also when recovery begins. The turn of a season always arrives against the prevailing mood.
Quick checkFactory utilization is at a record high, labor is short, and wages and prices are rising fast. Which of the four seasons is this closest to?
STEP 2Why waves form and how to measure them
Now that the seasons have names, let's learn why the waves form and measure the real waves of the Korean economy ourselves.
Good times plant the seeds of the next slowdown
The economy swings because economic agents amplify each other's moves. Recall the circular flow of money from Lesson 2. One person's spending is another person's income, so in good times good things push each other up, and in bad times bad things drag each other down. There are three typical links.
When goods sell well, companies produce more than they actually sell for fear of running out of stock. When sales weaken even slightly, they cut production sharply to work off the built-up inventory. The semiconductor price cycle in Lesson 3 is a classic example.
In an expansion, companies race to add factories and equipment, and that investment in turn creates jobs and income. But when capacity grows too much, supply floods the market, prices and profits fall, and investment stops all at once.
When the economy overheats and prices rise, the central bank raises the . Borrowing gets expensive, spending and investment cool, and the economy turns down. When a recession arrives, it cuts rates and stokes the fire again. You will learn this process in detail in Part 3.
All three links have the same shape. Excess built up in good times (inventory, equipment, debt, prices) becomes the cause of the next slowdown, and the clean-up in bad times (inventory run-down, rate cuts) becomes the base of the next recovery. Add an outside shock such as the 2008 financial crisis or COVID-19 in 2020, and the wave can suddenly get much deeper.
Korea's economic thermometer: the cyclical component of the coincident index
GDP alone is a poor thermometer for the economy, because it comes out only quarterly and with a delay. So Korea's statistics office (formerly Statistics Korea) combines several indicators that move together with the economy, such as production, consumption and employment, into a monthly composite coincident index, and publishes the , which is that index with the long-term growth trend removed. Above 100 means hotter than trend; below means cooler. The dotted line (long-term trend) in the STEP 1 picture is exactly 100.
Korea's cyclical component of the coincident index and official business-cycle peaks and troughs
Source: Bank of Korea ECOS 901Y067 composite economic indices · cyclical component of the coincident index (raw data from the national statistics office), Jan 2005 – Aug 2026, retrieved 2026-10-05. Peaks and troughs follow Statistics Korea's “Setting reference dates for the latest business cycles” (Mar 2, 2023); the Sep 2017 peak and May 2020 trough are provisional.
The shaded areas are the official contraction phases: from the Jan 2008 peak through the global financial crisis to the Feb 2009 trough; Aug 2011 to Mar 2013; and from the Sep 2017 peak through COVID-19 to the May 2020 trough. The last contraction lasted 32 months, the longest since reference dates began to be determined in 1972. On average since 1972, expansions last about 33 months, contractions about 20 months, and one full cycle about 53 months (four and a half years).
A season is confirmed only after it has passed
The official peaks and troughs () are not announced at the moment they occur. The statistics office makes the call after enough data has built up and expert opinion has been gathered, and in the past it took 19 to 55 months. Even the May 2020 trough was only provisionally set in March 2023. There is no official announcement yet for any peak after May 2020. On the chart, the cyclical component fell from the second half of 2022 to 99.1 at the end of 2025, then rebounded in 2026 to 101.7 in August. A December 2025 report by the Korea Institute of Finance estimated a peak in November 2022 and a trough around September 2025, but that is a research institute's estimate, not an official determination.
Common misconceptions
- “If growth isn't negative, the economy is doing well?”
- No. The phase of the cycle is judged by whether the economy is hotter or cooler “than trend.” Even with positive growth, a stretch below trend can be a contraction phase. Most of Korea's 11th-cycle contraction (2017–2020) had positive growth.
- “The business cycle comes regularly every 4–5 years?”
- That is only an average. Korean expansions have lasted as little as 17 months and as long as 54 months. Attempts to call the next recession by the calendar mostly fail.
- “A recession is a long winter lasting years?”
- Not always. By the standard of the US National Bureau of Economic Research (NBER), the 2020 US recession ran about two months, from the February peak to the April trough, the shortest in history.
Quick checkThe cyclical component of the coincident index has been falling for months from 101 and is now 100.5. It is still above 100, so can we say the economy is in an expansion phase?
STEP 3How the stock market changes with the seasons
Now let's connect the economy's seasons to the two knobs from Lesson 1. The stock market often changes its clothes before the season does.
Stock prices move before spring arrives
In Lesson 1 we said a stock price is set not by current earnings but by future earnings and the multiple. So the stock market starts moving not when the economy actually hits bottom, but from the moment it thinks it can see the bottom. 2020 is a good example.
- Mar 19, 2020KOSPI bottom
On COVID-19 fears the KOSPI fell to a close of 1,457.64. The cyclical component of the coincident index was still falling.
- May 2020Official economic trough
The cyclical component was at its lowest, 96.3, and this month was later determined to be the official trough. By May 29 the KOSPI was already at 2,029.60, about 39% above its bottom.
- Mar 2023Trough officially announced
The statistics office provisionally set May 2020 as the economic trough. That was three years after the stock market had already hit bottom.
Sources: KOSPI closes from Korea Exchange (Naver Finance quotes, 2020.3.19, 2020.5.29); cyclical component of the coincident index from Bank of Korea ECOS; reference dates from Statistics Korea (2023.3.2).
This is why stock prices often rise in the middle of a recession and turn down when the economy looks good. We look at how far stock prices lead the economy in more detail in Lesson 34.
Different sectors get stronger in different seasons
Sectors whose earnings swing widely with the economy are called , and sectors whose earnings are relatively steady regardless of the economy are called . Semiconductors, chemicals, steel, autos and shipbuilding are closer to cyclical stocks; food and beverage, telecom, electricity and gas, and pharmaceuticals are closer to defensive stocks. Even when the economy is bad, people still eat and use electricity, but they can put off a new car or a new factory.
| Phase | What the economy looks like | Sectors that tend to be relatively stronger |
|---|---|---|
| Recovery | Rates are low, inventory clean-up ends and output rebounds from the bottom | Financials, consumer discretionary, cyclical stocks that have passed their bottom |
| Expansion | Investment and employment grow and earnings rise fast | IT and semiconductors, industrials, machinery |
| Slowdown | Prices and interest rates are high and growth slows | Energy, materials, some defensive stocks |
| Recession | Output and employment fall and expectations of rate cuts grow | Consumer staples, utilities, health care |
This table summarizes the textbook tendencies of sector rotation. In reality it often diverges because of interest rates, exchange rates and each industry's own cycle (we check real cases in Lesson 35).
This flow, in which the strong sectors change as the phase changes, is called . Because investors try to read the seasons in advance, the order of sectors also tends to change ahead of the actual economy. You can see which sectors interest rates, exchange rates and oil prices currently favor on the Macro Map, and recent moves by sector on the Theme Map.
It is not always so. The phase of the economy is confirmed after the fact, the stock market moves ahead of it, and each sector has its own cycle (for example, the semiconductor inventory and price cycle). The four-season map is not a signal of “what to buy now”; it is a framework for understanding news and sector moves.
Quick checkNews of a deep recession is pouring in, yet cyclical stocks such as semiconductors and financials have started rising first. Why might that be?
✓What we learned today
- The economy cycles through recovery → expansion → slowdown → recession. The highest point is the peak, the lowest point is the trough, the stretch from trough to peak is the expansion phase, and the stretch from peak to trough is the contraction phase.
- The economy swings because inventory, business investment, and interest rates and lending amplify and then cut each other. Good times carry the seeds of the next slowdown, and bad times carry the seeds of the next recovery.
- Korea's phase of the cycle is read from the cyclical component of the coincident index, and the peaks and troughs are officially determined years later by the statistics office (formerly Statistics Korea) as reference dates. Since 1972 the average expansion is 33 months and the average contraction is 20 months.
- Stock prices often move before the economy. In 2020 the KOSPI hit its bottom of 1,457.64 on March 19, and by the end of May, the official economic trough, it was already at 2,029.60.
- The sectors where the earnings knob gets stronger differ by phase. Tell cyclical stocks from defensive stocks, and ask yourself, “Which season are we in now?”
You can only be sure of the economy's season after it has passed. In the next lesson you will learn about the signals that warn of a change of season in advance: leading indicators and the PMI.
Quiz5-question quiz
Pick an answer and it's graded right away with an explanation.
Q1. In the business cycle, what is the period from the “peak” to the “trough” called?
Trough to peak is the expansion phase, and peak to trough is the contraction phase. When split further into four seasons, the contraction phase includes the end of the slowdown and the recession.
Q2. Which is the best example of a good trend in an expansion causing the next slowdown?
When prices rise in good times, interest rates go up, borrowing gets expensive, and spending and investment cool. Excess inventory and equipment building up works on the same principle.
Q3. What does it mean when Korea's cyclical component of the coincident index is below 100?
The cyclical component has the long-term growth trend removed, so 100 is the trend line. Below 100 means cooler than trend, and that can happen even when growth is positive.
Q4. Which statement correctly describes the relationship between the 2020 KOSPI bottom (Mar 19, 1,457.64) and the official economic trough (May)?
Stock prices reflect future earnings and often move ahead of the economy. At the end of May, the official trough, the KOSPI was already at 2,029.60, about 39% above its bottom.
Q5. Which is closest to a sector called a “defensive stock” because its earnings are relatively steady regardless of the economy?
Even when the economy is bad, people still eat and use electricity, so the earnings of sectors like food and beverage, telecom and electricity swing less. Semiconductors, shipbuilding and steel are closer to cyclical stocks.
NextTerms · Next lesson · Related tools
The flow in which the economy repeats recovery → expansion → slowdown → recession.
RecessionRecessionA state in which economic activity such as output, income and jobs visibly shrinks for a considerable period. It is often described as 'two consecutive quarters of falling real GDP', but the official declaration takes multiple indicators into account.
Cyclical component of the coincident indexCyclical component of coincident indexThe coincident composite index, which bundles indicators that move with the economy such as production, consumption and employment, with its long-term trend removed. Above 100 means the economy is hotter than trend; below 100 means it is cooler.
Reference date of the business cycleReference date of business cycleThe official point in time when the economy hit a peak or a trough. In Korea, the statistics office (formerly Statistics Korea) determines and announces it a few years late, after the data has built up.
Leading indicatorLeading indicatorAn indicator that moves ahead of the actual economy. Stock prices, the PMI and the term spread are typical examples.
GDPGross Domestic ProductThe total value of the goods and services newly produced within a country over a given period.
Cyclical stockCyclical stockAn industry or stock whose earnings swing widely with the business cycle. Semiconductors, chemicals, steel, autos and shipbuilding are typical examples.
Defensive stockDefensive stockAn industry or stock whose earnings stay relatively steady even when the economy worsens. Food and beverages, telecommunications, electricity and gas, and pharmaceuticals are typical examples.
Sector rotationSector rotationThe flow in which the relatively strong sectors in the market change one after another as the phase of the economy changes. There is a textbook order, but in practice it often diverges.
Interest rateInterest rateThe price of borrowing money. When rates rise, the present value of future earnings falls, which tends to lower stock multiples.
This is educational material and not investment solicitation. There is no guarantee that past relationships will repeat in the future.