phases of business cycle essay

What Is the Business Cycle?

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on June 08, 2023

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Table of contents, what is a business cycle.

The business cycle is a natural occurrence in the economy. It is generally described as a sequence of periods of expansion, followed by a period of contraction, and finally a period of recovery.

Importance of Knowing the Business Cycle

Knowing the business cycle is important for a few reasons.

• First, it can help you understand how the economy works.
• Second, it can help you make informed investment decisions.
• Third, it can help you time your business decisions accordingly.

Phases of the Business Cycle

The business cycle has six phases:

1. Expansion

This is the first phase of the business cycle, and it’s generally marked by an increase in economic activity.

GDP (Gross Domestic Product) rises, unemployment falls, and prices increase. During this period, businesses are steadily growing their production and investing in new opportunities.

The peak is the point at which an expansion turns into contraction. It’s also known as the business cycle’s boom phase.

Expansion has reached its maximum growth, and now businesses are maxed out. They no longer have room to grow or invest, so they stop doing both—which affects supply (production), demand (usage of goods and services), employment, investment, prices, etc.

3. Recession

The recession is a period of economic decline that lasts from six months to a year; sometimes it can last up to 18 months or more (referred to as "Depression").

During this period most types of economic activity come to a halt. The unemployment rate rises as businesses lay off workers, and prices for goods and services drop.

4. Depression

This is the lowest point of the business cycle, which may also be referred to as the recession’s trough. At this point, GDP (Gross Domestic Product), employment, production, consumption, investment, personal income , and business profits are all low.

The trough is the bottom of the recession. This is where the economy hits its lowest point. In terms of GDP, employment, investment, prices, etc., it’s generally a very bleak time.

6. Recovery

The recovery phase starts when economic activity begins to rise again. It’s marked by an increase in economic activity, as businesses start hiring again and production begins to pick up.

Unemployment declines and prices begin to increase modestly.

This period can last for months or years depending on how long it takes an economy to recover from a depression—which happens in a small number of depressions that have been studied by economists.

Factors That Shape the Business Cycle

A number of things can trigger the business cycle, such as:

Labor Market Shocks

Changes in labor market conditions (changes in unemployment and wages) can affect businesses’ decisions about hiring and investing.

Demand-side shocks also play a role here: if consumers suddenly start spending more or less money that will affect businesses.

Supply-Side Shocks

These include changes in resource prices (the cost of oil, for example), which could decrease production costs—or they could increase them.

Supply-side shocks also include changes to technology. If technological advances allow companies to produce goods and services more cheaply, this will affect the economy by boosting supply and decreasing prices.

The Bottom Line

Understanding what happens during each phase of the business cycle is important because it can help you make better decisions about your finances.

For example, if you know a recession is on the horizon, you may want to start saving money or investing in short-term assets rather than long-term ones.

Business Cycle FAQs

What is the difference between a recession and a depression.

A recession is a period of economic decline that lasts from six months to a year. Depression is a longer period of economic decline that may last for up to 18 months or more.

How do labor market shocks trigger the business cycle?

Labor market shocks can affect businesses’ decisions about hiring and investing. For example, if unemployment rises, businesses may lay off workers. If wages change, that could also affect businesses’ decisions.

What is the difference between a supply-side shock and a demand-side shock?

A supply-side shock is an event that changes the cost of producing goods or services. A demand-side shock is an event that affects how much consumers want to buy.

How long does it usually take for an economy to recover from a depression?

It depends on how severe the depression is. In some cases, the economy may not fully recover for many years.

How should I react and protect myself in each stage of the business cycle?

During an expansionary period, it can be beneficial to invest in long-term assets. During the recession phase, you may want to start saving money or investing in short-term assets like CDs (Certificates of Deposit). When the economy is booming and prices are high, it could be a good time to buy goods; when the economy is weak this isn’t necessarily the best time to make purchases.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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Business Cycle

Published on :

21 Aug, 2024

Blog Author :

Edited by :

Reviewed by :

Dheeraj Vaidya

Business Cycle Definition

The business cycle refers to the alternating phases of economic growth and decline. Since the phases are recurring, they often occur in an identifiable pattern where one phase usually follows the other.

This cyclical nature of the economy is taken into account when policymakers make major decisions. Just because the cycles are repetitive doesn't mean they can be avoided. The fluctuations are caused by parameters like GDP, production, employment, aggregate demand, real income , and consumer spending. Business cycles are also called trade cycles or economic cycles.

Table of contents

Business cycle in economics explained, business cycle phases with graph.

• Example of Business Cycle 

Limitations

Frequently asked questions (faqs), recommended articles.

• A business cycle is the repetitive economic changes that take place in a country over a period. It is identified through the variations in the GDP along with other macroeconomics indexes.
• The four phases of the business cycle are expansion, peak, contraction, and trough.
• The risk and adverse effects of the phases can be mitigated through wisely devising monetary and fiscal policies.
• The National Bureau of Economic Research (NBER) in the US has formed a Businss Cycle Dating Committee (BCDC) for recognizing, tracking, and reporting the different economic phases.

A business cycle is a macroeconomic oscillation that affects the nation's growth and productivity. They are also called trade cycles or economic cycles. NBER is a US-based non-profit organization. It is a private non-partisan research organization. The National Bureau of Economic Research (NBER) identifies and gauges the economic cycle. It has a Business Cycle Dating Committee responsible for keeping the chronological record of the economic stages. To determine economic conditions NBER uses the following parameters; GDP, production, employment, aggregate demand, real income, and consumer spending.

The Keynesian economic theory emphasizes the impact of demand on the business cycle. It believes that the government needs to correct the economic deflation and attain a full employment level when the aggregate demand shifts to the left. Moreover, the Real Business Cycle (RBC) and New Classical economics suggest that the economy reaches a new equilibrium whenever there is a shift in the aggregate supply. Ultimately the economy has a self-healing mechanism and doesn't require government intervention.

Every capitalist economy repeatedly goes through the different phases of the business cycle, i.e., expansion, peak, contraction, and trough. Although these ups and downs in the economy may correct by themselves in the long run, the government and the central bank use economic policies to reduce the impact of trade cycle fluctuations. At the same time, the central bank can inject expansionary or contractionary monetary policies like interest rate changes or supply of money. Further, to mitigate fluctuations, the government uses fiscal policy tools like tax rates and government spending. These measures are taken to avoid risky situations like stagflation or hyperinflation.

A country keeps track of the trade cycle to ensure that the economy is on the path of growth, unemployment steeps down, and the inflation rate remains under control. To understand the economic fluctuations and pattern, let us have a look at the following graph:

An economy is expected to have constant growth, represented by the growth trend line. In reality, though, the economy is unstable. National output goes up and down periodically. It expands to touch the peak and contracts down to the trough.

Thus, a trade cycle consists of the following four phases:  

• Expansion : When a nation's GDP shows an upward move or recovers with time, this period of growth is remarked as economic expansion. During this phase, the various economic indicators like consumer spending, income, demand, supply, employment, output, and business returns shoot up.
• Peak : During the expansion phase, the GDP spikes to its highest level; this is considered the economy's peak. At this point, economic factors like income, consumer spending, and employment level remain constant.
• Contraction : Next comes the phase of economic slowdown; it occurs when the stagnant peak GDP starts tumbling down towards the trough. With this, the nation's production, employment level, demand, supply, income level, and other economic parameters plummet.
• Trough : This is the stage at which the GDP and other economic indicators are at their lowest. During this phase, the economy gets stuck at a negative growth rate. Additionally, the demand for goods and services reduces.

Example of Business Cycle 

Nigeria is one of the largest economies in Africa. Yet, Nigeria's economy contracted by almost 1.92% in the second and third quarter of 2020 amidst the Covid 19 Pandemic. According to Reuters, this trashed the nation's GDP that grew by nearly 2.2% in 2019, after recovering from 2016's contraction.

 The reason behind this trade cycle fluctuation was the fall in demand and prices of crude oil globally. The lockdown and Covid measures imposed in many countries hit hard. Manufacturing, aviation, trade, hospitality, transportation, and many other industrial sectors slowed down. These industries directly or indirectly needed crude oil, the demand for the commodity dropped.

However, this contraction was short-lived; Nigeria showed a recovery in the last quarter of 2020 as Covid restrictions were eased out to some extent. According to the National Bureau of Statistics (NBS), the nation's growth rate was up by 0.11% in the fourth quarter of 2020. In contrast, the non-oil sectors like food manufacturing, telecom, construction, crop production, and real estate marked a phenomenal growth of 1.69% during the same period.

The effect of the pandemic on Nigeria was not as harsh as IMF anticipated. The contraction was only 3.2%. Subsequently, by 2021 the IMF assumes a 1.5% growth in the nation's economy.

Predicting the business cycle phase is crucial for policymakers and governments so that they can deal with deflation and inflation accordingly. The cycle also warns investors, owners, consumers, and strategists. However, the following are the disadvantages associated with the business cycle:

• Limited Information : Since the economic cycle analysis is based on research, it becomes difficult for economists to access complete and accurate data. Moreover, the process of correlating and interpreting acquired information is equally challenging.
• Two Contrasting Models : The Keynesian theories consider money supply to be the important factor behind fluctuations. But the Real Business Cycle theory opposes this concept and proposes that market imperfection is the important factor behind fluctuations.
• Human Glitch : Economic researchers are humans; they are the ones who study trade cycle trends and present economic indicators that cause the trend. Thus, this analysis is prone to human errors.

A business cycle refers to the long-term fluctuations in the economic output of a nation. In other words, it is the upswing or downfall of a country's GDP.  This is also applied to a particular product or a segment of the market.

The changing Gross Domestic Product (GDP) of any nation triggers the fluctuations. The GDP itself rises or falls due to the impact of various demand factors like monetary policy, credit cycle, consumer confidence, housing prices, accelerator effect, multiplier effect, income effect, and exchange rate. The economy is affected by the following supply factors: population, financial instability, lending cycle, unemployment, labor market condition, technological changes, and inventory cycle.

A typical business cycle persists for 5.5 years on average; however, it may be shorter or longer than this. While the economy self-corrects over time, various monetary and fiscal policy measures are implemented to create economic balance.

This has been a guide to Business Cycle and its Definition. Here we discuss 4 phases of the business cycle in economics using graphs and examples. You can learn more about economics from the following articles -

• Formula of Operating Cycle
• Accounting Cycle
• Formula of Cash Conversion Cycle
• Accounts Payable Cycle

What is Business Cycles? Phases, Types, Theory, Nature

• Post last modified: 1 August 2021
• Reading time: 40 mins read
• Post category: Economics

What is the Business Cycle?

Business Cycle , also known as the  economic cycle  or  trade cycle , is the fluctuations in economic activities or rise and fall movement of gross domestic product (GDP) around its long-term growth trend.

No era can stay forever. The economy too does not enjoy same periods all the time. Due to its dynamic nature, it moves through various phases.

Table of Content

• 1 What is the Business Cycle?
• 2 Business Cycle Definition
• 3.1 Expansion
• 3.3 Contraction
• 4.1 Cyclical nature
• 4.2 General nature
• 5 Types of Business Cycle
• 6.1 Hawtrey Monetary Theory
• 6.2 Innovation Theory
• 6.3 Keynesian Theory
• 6.4 Hicks Theory
• 6.5 Samuelson theory
• 7 Business Economics Tutorial

The change in business activities due to fluctuations in economic activities over a period of time is known as a business cycle . Business cycle are also called trade cycle or economic cycle. Business Cycle  can also help you make better financial decisions. 

The economic activities of a country include total output, income level, prices of products and services, employment, and rate of consumption. All these activities are interrelated; if one activity changes, the rest of them also change.

Also Read: What is Economics?

Business Cycle Definition

Arthur F. Burns and Wesley C. Mitchel defined business cycle definition as

Business cycle are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; in duration, business cycle vary from more than one year to ten or twelve years; they are not divisible into shorter cycle of similar characteristics with amplitudes approximating their own. Arthur F. Burns & Wesley C. Mitchel

Also Read: What is Demand in Economics

Phases of Business Cycle

4 Phases of Business Cycle are:

Contraction

Let us discuss 4 phases of business cycle in detail:

Expansion is the first phase of a business cycle . It is often referred to as the growth phase .

In the expansion phase, there is an increase in various economic factors, such as production, employment, output, wages, profits, demand and supply of products, and sales. During this phase, the focus of organisations remains on increasing the demand for their products/services in the market.

The expansion phase is characterised by:

• Increase in demand
• Growth in income
• Rise in competition
• Rise in advertising
• Creation of new policies
• Development of brand loyalty

In this phase, debtors are generally in a good financial condition to repay their debts; therefore, creditors lend money at higher interest rates. This leads to an increase in the flow of money.

In the expansion phase, due to increase in investment opportunities, idle funds of organisations or individuals are utilised for various investment purposes. The expansion phase continues till economic conditions are favourable.

Peak is the next phase after expansion. In this phase, a business reaches at the highest level and the profits are stable. Moreover, organisations make plans for further expansion.

Peak phase is marked by the following features:

• High demand and supply
• High revenue and market share
• Reduced advertising
• Strong brand image

In the peak phase, the economic factors, such as production, profit, sales, and employment, are higher but do not increase further.

An organisation after being at the peak for a period of time begins to decline and enters the phase of contraction. This phase is also known as a recession .

An organisation can be in this phase due to various reasons, such as a change in government policies, rise in the level of competition, unfavourable economic conditions, and labour problems. Due to these problems, the organisation begins to experience a loss of market share.

The important features of the contraction phase are:

• Reduced demand
• Loss in sales and revenue
• Reduced market share
• Increased competition

In Trough phase, an organisation suffers heavy losses and falls at the lowest point. At this stage, both profits and demand reduce. The organisation also loses its competitive position.

The main features of this phase are:

• Lowest income
• Loss of customers
• Adoption of measures for cost-cutting and reduction
• Heavy fall in market share

In this phase, the growth rate of an economy becomes negative. In addition, in trough phase, there is a rapid decline in national income and expenditure.

After studying the business cycle , it is important to study the nature of business cycle .

Read: Difference Between Micro and Macro Economics

Nature of Business Cycle

The nature of business cycle helps the organisation to be prepared for facing uncertainties of the business environment.

Cyclical nature

General nature.

Let us discuss the nature of business cycle in detail.

This is the periodic nature of a business cycle. Periodicity signifies the occurrence of business cycle at regular intervals of time. However, periods of intervals are different for different business cycle . There is a general consensus that a normal business cycle can take 7 to 10 years to complete.

The general nature of a business cycle states that any change in an organisation affects all other organisations too in the industry. Thus, general nature regards the business world as a single economic unit.

For example, depression moves from one organisation to the other and spread throughout the industry. The general nature is also known as synchronism.

Read: What is Business Economics?

Types of Business Cycle

Following the writings of Prof .James Arthur and Schumpeter, we can classify business cycle into three types based on the underlying time period of existence of the cycle as follows:

• Short Kitchin Cycle
• Longer Juglar cycle
• Very long Kondratieff Wave

Short Kitchin Cycle (very short or minor period of the cycle, approximately 40 months duration)

Longer Juglar cycle (major cycles, composed of three minor cycles and of the duration of 10 years or so)

Very long Kondratieff Wave (very long waves of cycle, made up of six major cycles and takes more than 60 years to run its course of duration)

Also Read: Scope of Economics

Business Cycle Theory

A business cycle is a complex phenomenon which is common to every economic system. Several theories of business cycle have been propounded from time to time to explain the causes of business cycle.

Business Cycle Theory are:

Hawtrey Monetary Theory

Innovation theory.

• Keynesian theory

Hicks Theory

Samuelson theory.

Hawtray was of opinion that in depression monetary factors play a critical role. The main factor affecting the flow of money and money supply is the credit position by the bank. He made the classical quantity theory of money as the basis of his trade cycle theory .

According to him, both monetary and non-monetary factors also affect trade. His theory is basically the product of the supply of money and expansion of credit. This expansion of credit and other money supply instrument create a cumulative process of expansion which in return increase aggregate demand.

According to this theory the only cause of fluctuations in business is due to instability of bank credit. So it can be concluded that Hawtray’s theory of business cycle is basically depend upon the money supply, bank credits and rate of interests.

Criticism of this Business Cycle theory

• Hawtray neglected the role of non-monetary factors like prosperous agriculture, inventions, rate of profit and stock of capital.
• It only concentrates on the supply of money.
• Increase in interest rates is not only due to economic prosperity but also due to other factors.
• Over-emphasis on the role of wholesalers.
• Too much confidence in monetary policy. vi. Neglect the role of expectations. vii. Incomplete theory of trade cycles.

The innovation theory of business cycle is invented by an American Economist Joseph Schumpeter. According to this theory, the main causes of business cycle are over-innovations.

He takes the meaning of innovation as the introduction and application of such techniques which can help in increasing production by exploiting the existing resources, not by discoveries or inventions. Innovations are always inspired by profits. Whenever innovations are introduced it results into profitability then shared by other producers and result in a decline in profitability.

• Innovation fails to explain the period of boom and depression.
• Innovation may be major factor of investment and economic activities but not the complete process of trade cycle.
• This theory is based on the assumption that every new innovation is financed by the banks and other credit institutions but this cannot be taken as granted because banks finance only short term loans and investments.

Keynesian Theory

The theory suggests that fluctuations in business cycle can be explained by the perceptions on expected rate of profit of the investors. In other words, the downswing in business cycle is caused by the collapse in the marginal efficiency of capital, while revival of the economy is attributed to the optimistic perceptions on the expected rate of profit.

Moreover, Keynesian multiplier theory establishes linkages between change in investment and change in income and employment. However, the theory fails to explain the cumulative character both in the upswing and downswing phases of business cycle and cyclical fluctuations in economic activity with the passage of time.

Hicks extended the earlier multiplier-accelerator interaction theory by considering real world situation. In reality, income and output do not tend to explode; rather they are located at a range specified by the upper ceiling and lower floor determined by the autonomous investment.

In the theory, it is assumed that autonomous investment tends to grow at a constant percentage rate over the long run, the acceleration co-efficient and multiplier co-efficient remain constant throughout the different phases of the trade cycle, saving and investment co-efficient are such that upward movements take away from equilibrium.

The actual output fails to adjust with the equilibrium growth path overtime. In fact it has a tendency to run above it and then below it, and thereby, constitute cyclical fluctuations overtime. This basic intuition can be shown with the help of the following figure.

• Wrong assumption of constant multiplier and acceleration co-efficient.
• Highly mechanical and mathematical device.
• Wrong assumption of no-excess capacity.
• Full-employment ceiling is not independent

According to this theory process of multiplier starts working when autonomous investment takes place in the economy. With the autonomous investment income of the people rises and there is increase in the demand of consumer goods. It directly affected the marginal propensity to consume.

If there is no excess production capacity in the existing industry then existing stock of capital would not be adequate to produce consumer goods to meet the rising demand. Now in order to meet the consumer’s requirements, producers will make new investment which is derived investment and the process of acceleration principle comes into operation.

Then there is rise in income again which in the same manner continue the process of income propagation. So in this way multiplier and acceleration interact and make the income grow at faster rate than expected. After reaching its peak, income comes down to bottom and again start rising.

Autonomous investment is incurred by the government with the objective of social welfare. It is also called public investment. The autonomous investment is the investment which is done for the sake of new inventions in techniques of production.

Derived investment is the investment undertaken in capital equipment which is induced by increase in consumption.

• This model only concentrates on the impact of the multiplier and acceleration and it ignored the role of producer’s expectations, changing business requirements and consumers preferences etc.
• It is not practically possible to compute the fact of multiplier and acceleration principle.
• It has wrong assumption of constant capital output ratio.

Also Read: What is Law of Supply?

• D N Dwivedi, Managerial Economics , 8th ed, Vikas Publishing House
• Petersen, Lewis & Jain, Managerial Economics , 4e, Pearson Education India
• Brigham, & Pappas, (1972). Managerial economics , 13ed. Hinsdale, Ill.: Dryden Press.
• Dean, J. (1951). Managerial economics (1st ed.). New York: Prentice-Hall.

Business Economics Tutorial

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• What is Economics?
• Scope of Economics
• Nature of Economics
• What is Business Economics?
• Micro vs Macro Economics
• Laws of Economics
• Economic Statics and Dynamics
• Gross National Product (GNP)
• What is Business Cycle?
• W hat is Inflation?
• What is Demand?
• Types of Demand
• Determinants of Demand 
• Law of Demand
• What is Demand Schedule?
• What is Demand Curve?
• What is Demand Function?
• Demand Curve Shifts
• What is Supply?
• Determinants of Supply
• Law of Supply
• What is Supply Schedule?
• What is Supply Curve?
• Supply Curve Shifts
• What is Market Equilibrium?

Consumer Demand Analysis

• Consumer Demand
• Utility in Economics
• Law of Diminishing Marginal Utility
• Cardinal and Ordinal Utility
• Indifference Curve
• Marginal Rate of Substitution
• Budget Line
• Consumer Equilibrium

Revealed Preference Theory

Elasticity of Demand & Supply

• Elasticity of Demand
• Price Elasticity of Demand

Types of Price Elasticity of Demand

• Factors Affecting Price Elasticity of Demand
• Importance of Price Elasticity of Demand
• Income Elasticity of Demand
• Cross Elasticity of Demand
• Advertisement Elasticity of Demand
• Elasticity of Supply

Cost & Production Analysis

• Production in Economics
• Production Possibility Curve
• Production Function
• Types of Production Functions
• Production in the Short Run
• Law of Diminishing Returns
• Isoquant Curve
• Producer Equilibrium
• Returns to Scale

Cost and Revenue Analysis

• Types of Cost
• Short Run Cost
• Long Run Cost
• Economies and Diseconomies of Scale
• What is Revenue?

Market Structure

• Types of Market Structures
• Profit Maximization
• What is Market Power?
• Demand Forecasting
• Methods of Demand Forecasting
• Criteria for Good Demand Forecasting

Market Failure

• What Market Failure?
• Price Ceiling and Price Floor

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What Is a Business Cycle?

• How It Works
• Measuring and Dating
• Relationship With Stock Prices

The Bottom Line

Business cycle: what it is, how to measure it, and its 4 phases.

• Depression in the Economy: Definition and Example
• Economic Collapse
• Business Cycle CURRENT ARTICLE
• Boom And Bust Cycle
• Negative Growth
• What Was the Great Depression?
• Were There Any Periods of Major Deflation in U.S. History?
• The Greatest Generation
• U.S. Government Financial Bailouts
• Austerity: When the Government Tightens Its Belt
• The New Deal
• The Economic Effects of the New Deal
• Gold Reserve Act of 1934
• Emergency Banking Act of 1933

Madelyn Goodnight / Investopedia

Business cycles are a type of fluctuation found in the aggregate economic activity of a nation—a cycle that consists of expansions occurring at about the same time in many economic activities, followed by similarly general contractions. This sequence of changes is recurrent but not periodic.

The business cycle is also called the economic cycle .

Key Takeaways

• Business cycles are composed of concerted cyclical upswings and downswings in the broad measures of economic activity—output, employment, income, and sales.
• The alternating phases of the business cycle are expansions and contractions.
• Contractions often lead to recessions, but the entire phase isn't always a recession.
• Recessions often start at the peak of the business cycle—when an expansion ends—and end at the trough of the business cycle, when the next expansion begins.
• The severity of a recession is measured by the three Ds: depth, diffusion, and duration.

Understanding the Business Cycle

In essence, business cycles are marked by the alternation of the phases of expansion and contraction in aggregate economic activity and the co-movement among economic variables in each phase of the cycle.

Aggregate economic activity is represented by not only real (i.e., inflation-adjusted) GDP —a measure of aggregate output—but also the aggregate measures of industrial production, employment, income, and sales, which are the key coincident economic indicators used for the official determination of U.S. business cycle peak and trough dates.

Popular misconceptions are that the contractionary phase is a recession and that two consecutive quarters of decline in real GDP (an informal rule of thumb) means a recession.

It's important to note that recessions occur during contractions but are not always the entire contractionary phase. Also, consecutive declines in real GDP are one of the indicators used by the NBER, but it is not the definition the organization uses to determine recessionary periods.

On the flip side, a business cycle recovery begins when that recessionary vicious cycle reverses and becomes a virtuous cycle, with rising output triggering job gains, rising incomes, and increasing sales that feedback into a further rise in output .

The recovery can persist and result in a sustained economic expansion only if it becomes self-feeding, which is ensured by this domino effect driving the diffusion of the revival across the economy.

Of course, the stock market is not the economy. Therefore, the business cycle should not be confused with market cycles , which are measured using broad stock price indices.

Measuring and Dating Business Cycles

The severity of a recession is measured by the three D's: depth, diffusion, and duration. A recession's depth is determined by the magnitude of the peak-to-trough decline in the broad measures of output, employment, income, and sales.

Its diffusion is measured by the extent of its spread across economic activities, industries, and geographical regions. Its duration is determined by the time interval between the peak and the trough.

An expansion begins at the trough (or bottom) of a business cycle and continues until the next peak, while a recession starts at that peak and continues until the following trough.

The National Bureau of Economic Research (NBER) determines the business cycle chronology—the start and end dates of recessions and expansions for the United States.

Accordingly, its Business Cycle Dating Committee considers a recession to be "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

The Great Depression featured many recessions, one of which lasted for 44 months.

The Dating Committee typically determines recession start and end dates long after the fact. For instance, after the end of the 2007–09 recession, it "waited to make its decision until revisions in the National Income and Product Accounts [were] released on July 30 and Aug. 27, 2010," and announced the June 2009 recession end date on Sept. 20, 2010.

U.S. expansions have lasted longer than U.S. contractions on average. Between 1945 and 2019, the average expansion lasted about 65 months. The average recession lasted approximately 11 months.

Between the 1850s and World War II, the average expansion lasted about 26 months and the average recession about 21 months. The longest expansion was from 2009 to 2020, which lasted 128 months.

Stock Prices and the Business Cycle

The biggest stock price downturns tend to occur—but not always—around business cycle downturns (e.g., contractions and recessions). For example, the Dow Jones Industrial Average and the S&P 500 took steep dives during the Great Recession. The Dow fell 51.1%, and the S&P 500 fell 56.8% between Oct. 9, 2007 to March 9, 2009.

There are many reasons for this, but primarily, it is because businesses assume defensive measures and investor confidence falls during contractionary periods. Many events occur before people in an economy are aware they are in a contraction, but the stock market trails what is going on in the economy.

So, if there is speculation or rumors about a recession, mass layoffs , rising unemployment, decreasing output, or other indications, businesses and investors begin to fear a recession and act accordingly. Businesses assume defensive tactics, reducing their workforces and budgeting for an environment of falling revenues.

Investors flee to investments "known" to preserve capital, demand for expansionary investments falls, and stock prices drop.

It's important to remember that while stock prices tend to fall during economic contractions, the phase does not cause stock prices to fall—fear of a recession causes them to fall.

What Are the Stages of the Business Cycle?

In general, the business cycle consists of four distinct phases: expansion, peak, contraction, and trough.

What Does a Business Cycle Describe?

A business cycle describes the fluctuations in an economy over a period of time, generally the period from the start of one recession to the start of the next. This would include periods when the economy grows.

Are Business Cycles Predictable?

Generally, business cycles are not predictable. Economies are complex machines that function in a variety of ways and are intertwined in as many ways. The ability to predict how they will move is extremely difficult. There can be signs of changes in an economy, such as changes in inflation and production, but to predict an all-out change in the business cycle is very tough if not impossible.

The business cycle is the time it takes the economy to go through all four phases of the cycle: expansion, peak, contraction, and trough. Expansions are times of increasing profits for businesses, and rising economic output, and are the phase the U.S. economy spends the most time in. Contractions are times of decreasing profits and lower output and are the phase in which the least amount of time is spent.

Federal Reserve Bank of St. Louis. " All About the Business Cycle: Where Do Recessions Come From? "

The National Bureau of Economic Research. " Business Cycle Dating ."

National Bureau of Economic Research. " The NBER's Recession Dating Procedure ."

Congressional Research Service. " Introduction to U.S. Economy: The Business Cycle and Growth ," Page 1.

National Bureau of Economic Research. " Business Cycle Dating Committee, National Bureau of Economic Research ."

Congressional Research Service. " Introduction to U.S. Economy: The Business Cycle and Growth ," Page 2.

Federal Reserve Bank of Atlanta. " Stock Prices in the Financial Crisis ."

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Business Cycle

A series of expansion and contraction in economic activity

What is a Business Cycle?

A business cycle is a cycle of fluctuations in the Gross Domestic Product (GDP) around its long-term natural growth rate. It explains the expansion and contraction in economic activity that an economy experiences over time.

A business cycle is completed when it goes through a single boom and a single contraction in sequence. The time period to complete this sequence is called the length of the business cycle.

A boom is characterized by a period of rapid economic growth, whereas a period of relatively stagnated economic growth is a recession. These are measured in terms of the growth of the real GDP, which is inflation-adjusted.

Stages of the Business Cycle

In the diagram above, the straight line in the middle is the steady growth line. The business cycle moves about the line.  Below is a more detailed description of each stage in the business cycle:

1. Expansion

The first stage in the business cycle is expansion. In this stage, there is an increase in positive economic indicators such as employment, income, output, wages, profits, demand, and supply of goods and services. Debtors are generally paying their debts on time, the velocity of the money supply is high, and investment is high. This process continues as long as economic conditions are favorable for expansion.

The economy then reaches a saturation point, or peak, which is the second stage of the business cycle. The maximum limit of growth is attained. The economic indicators do not grow further and are at their highest. Prices are at their peak. This stage marks the reversal point in the trend of economic growth. Consumers tend to restructure their budgets at this point.

3. Recession

The recession is the stage that follows the peak phase. The demand for goods and services starts declining rapidly and steadily in this phase. Producers do not notice the decrease in demand instantly and go on producing, which creates a situation of excess supply in the market. Prices tend to fall. All positive economic indicators such as income, output, wages, etc., consequently start to fall.

4. Depression

There is a commensurate rise in unemployment. The growth in the economy continues to decline, and as this falls below the steady growth line, the stage is called a depression.

In the depression stage, the economy’s growth rate becomes negative. There is further decline until the prices of factors, as well as the demand and supply of goods and services, contract to reach their lowest point. The economy eventually reaches the trough. It is the negative saturation point for an economy. There is extensive depletion of national income and expenditure.

6. Recovery

After the trough, the economy moves to the stage of recovery. In this phase, there is a turnaround in the economy, and it begins to recover from the negative growth rate. Demand starts to pick up due to low prices and, consequently, supply begins to increase. The population develops a positive attitude towards investment and employment and production starts increasing.

Employment begins to rise and, due to accumulated cash balances with the bankers, lending also shows positive signals. In this phase, depreciated capital is replaced, leading to new investments in the production process. Recovery continues until the economy returns to steady growth levels. 

This completes one full business cycle of boom and contraction. The extreme points are the peak and the trough.

Explanations by Economists

John Keynes explains the occurrence of business cycles is a result of fluctuations in aggregate demand, which bring the economy to short-term equilibriums that are different from a full-employment equilibrium.

Keynesian models do not necessarily indicate periodic business cycles but imply cyclical responses to shocks via multipliers. The extent of these fluctuations depends on the levels of investment, for that determines the level of aggregate output.

In contrast, economists like Finn E. Kydland and Edward C. Prescott, who are associated with the Chicago School of Economics, challenge the Keynesian theories. They consider the fluctuations in the growth of an economy not to be a result of monetary shocks, but a result of technology shocks, such as innovation.

Additional Resources

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Explain the Four Phases of Business Cycle

This essay about the four phases of the business cycle breaks down the economic ebb and flow into expansion, peak, contraction, and trough. It likens the economy to the heartbeat, where each phase plays a crucial role in its health and rhythm. Expansion is the phase of growth and optimism, followed by the peak where things level off. Contraction brings a slowdown, potentially dipping into recession, and the trough is the economy’s lowest point, from which recovery begins. Understanding these phases is akin to checking the weather forecast, offering valuable insights for making informed decisions in investing, business, and personal finance. The essay presents this cycle not just as an academic concept but as a practical tool for navigating economic changes.

How it works

Cracking the code of the business cycle feels a bit like trying to predict the weather—just when you think you’ve got it figured out, a curveball comes your way. But just like weather forecasts, understanding the business cycle gives us a rough guide on what to expect in the economy. Think of it as the economy’s heartbeat, with four distinct beats: expansion, peak, contraction, and trough.

During expansion, it’s all systems go. The economy’s buzzing—businesses are churning out goods, hiring left and right, and everyone’s feeling pretty optimistic.

It’s like the economy’s having a great day, sun’s out, and wallets are open. But then, we hit the peak, the high point where things can’t get much better, and inflation starts to sneak up, hinting that what goes up must come down.

Enter contraction, the mood dampener. It’s when things start to cool off—sales drop, belts tighten, and jobs aren’t as secure. It’s the part of the cycle that gets all the press, especially if it dips into a recession, turning the economic weather from sunny to stormy.

Finally, we find ourselves at the trough, the economy’s version of hitting rock bottom and realizing the only way out is up. It’s a time of cautious optimism, where the seeds of recovery are planted, ready to grow into the next expansion phase.

So, why bother understanding these economic ups and downs? Well, just like checking the weather before you head out, knowing which phase the economy is in can help you make smarter decisions—whether you’re investing, running a business, or just planning your budget. Sure, the business cycle might be unpredictable, but having a heads-up on what could come next is always a good idea.

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What Are the Phases of the Business Cycle?

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• U.S. Economy
• Supply & Demand
• Archaeology
• Ph.D., Business Administration, Richard Ivey School of Business
• M.A., Economics, University of Rochester
• B.A., Economics and Political Science, University of Western Ontario

Parkin and Bade's text Economics gives the following definition of the business cycle: 

The business cycle is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in real GDP and other macroeconomic variables.

To put it simply, the business cycle is defined as the real fluctuations in economic activity and gross domestic product (GDP) over a period of time. The fact that the economy experiences these ups-and-downs in activity should be no surprise. In fact, all modern industrial economies like that of the United States endure considerable swings in economic activity over time.

The ups may be marked by indicators like high growth and low unemployment while the downs are generally defined by low or stagnant growth and high unemployment. Given its relationship to the phases of the business cycle, unemployment is but one of the various economic indicators used to measure economic activity. A lot of information can be gleaned from the various economic indicators and their relationship to the business cycle.

Parkin and Bade go on to explain that despite the name, the business cycle is not a regular, predictable, or repeating the cycle. Though its phases can be defined, its timing is random and, to a large degree, unpredictable.

The Phases of the Business Cycle

While no two business cycles are exactly the same, they can be identified as a sequence of four phases that were classified and studied in their most modern sense by American economists Arthur Burns and Wesley Mitchell in their text "Measuring Business Cycles." The four primary phases of the business cycle include:

• Expansion: A speedup in the pace of economic activity defined by high growth, low unemployment, and increasing prices. The period marked from trough to peak.
• Peak:  The upper turning point of a business cycle and the point at which expansion turns into contraction.
• Contraction: A slowdown in the pace of economic activity defined by low or stagnant growth, high unemployment, and declining prices. It is the period from peak to trough.
• Trough: The lowest turning point of a business cycle in which a contraction turns into an expansion. This turning point is also called Recovery . 

These four phases also make up what is known as the "boom-and-bust" cycles, which are characterized as business cycles in which the periods of expansion are swift and the subsequent contraction is steep and severe.

But What About Recessions?

A recession occurs if a contraction is severe enough. The National Bureau of Economic Research (NBER) identifies a recession as a contraction or significant decline in economic activity "lasting more than a few months, normally visible in real GDP, real income, employment, industrial production."

Along the same vein, a deep trough is called a slump or a depression. The difference between a recession and a depression is critical, though it is not always well-understood by non-economists.

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5 Phases of a Business Cycle (With Diagram)

Business cycles are characterized by boom in one period and collapse in the subsequent period in the economic activities of a country.

These fluctuations in the economic activities are termed as phases of business cycles.

The fluctuations are compared with ebb and flow. The upward and downward fluctuations in the cumulative economic magnitudes of a country show variations in different economic activities in terms of production, investment, employment, credits, prices, and wages. Such changes represent different phases of business cycles.

The different phases of business cycles are shown in Figure-1:

There are basically two important phases in a business cycle that are prosperity and depression. The other phases that are expansion, peak, trough and recovery are intermediary phases.

Figure-2 shows the graphical representation of different phases of a business cycle:

As shown in Figure-2, the steady growth line represents the growth of economy when there are no business cycles. On the other hand, the line of cycle shows the business cycles that move up and down the steady growth line. The different phases of a business cycle (as shown in Figure-2) are explained below.

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1. Expansion :

The line of cycle that moves above the steady growth line represents the expansion phase of a business cycle. In the expansion phase, there is an increase in various economic factors, such as production, employment, output, wages, profits, demand and supply of products, and sales.

In addition, in the expansion phase, the prices of factor of production and output increases simultaneously. In this phase, debtors are generally in good financial condition to repay their debts; therefore, creditors lend money at higher interest rates. This leads to an increase in the flow of money.

In expansion phase, due to increase in investment opportunities, idle funds of organizations or individuals are utilized for various investment purposes. Therefore, in such a case, the cash inflow and outflow of businesses are equal. This expansion continues till the economic conditions are favorable.

The growth in the expansion phase eventually slows down and reaches to its peak. This phase is known as peak phase. In other words, peak phase refers to the phase in which the increase in growth rate of business cycle achieves its maximum limit. In peak phase, the economic factors, such as production, profit, sales, and employment, are higher, but do not increase further. In peak phase, there is a gradual decrease in the demand of various products due to increase in the prices of input.

The increase in the prices of input leads to an increase in the prices of final products, while the income of individuals remains constant. This also leads consumers to restructure their monthly budget. As a result, the demand for products, such as jewellery, homes, automobiles, refrigerators and other durables, starts falling.

3. Recession :

As discussed earlier, in peak phase, there is a gradual decrease in the demand of various products due to increase in the prices of input. When the decline in the demand of products becomes rapid and steady, the recession phase takes place.

In recession phase, all the economic factors, such as production, prices, saving and investment, starts decreasing. Generally, producers are unaware of decrease in the demand of products and they continue to produce goods and services. In such a case, the supply of products exceeds the demand.

Over the time, producers realize the surplus of supply when the cost of manufacturing of a product is more than profit generated. This condition firstly experienced by few industries and slowly spread to all industries.

This situation is firstly considered as a small fluctuation in the market, but as the problem exists for a longer duration, producers start noticing it. Consequently, producers avoid any type of further investment in factor of production, such as labor, machinery, and furniture. This leads to the reduction in the prices of factor, which results in the decline of demand of inputs as well as output.

4. Trough :

During the trough phase, the economic activities of a country decline below the normal level. In this phase, the growth rate of an economy becomes negative. In addition, in trough phase, there is a rapid decline in national income and expenditure.

In this phase, it becomes difficult for debtors to pay off their debts. As a result, the rate of interest decreases; therefore, banks do not prefer to lend money. Consequently, banks face the situation of increase in their cash balances.

Apart from this, the level of economic output of a country becomes low and unemployment becomes high. In addition, in trough phase, investors do not invest in stock markets. In trough phase, many weak organizations leave industries or rather dissolve. At this point, an economy reaches to the lowest level of shrinking.

5. Recovery :

As discussed above, in trough phase, an economy reaches to the lowest level of shrinking. This lowest level is the limit to which an economy shrinks. Once the economy touches the lowest level, it happens to be the end of negativism and beginning of positivism.

This leads to reversal of the process of business cycle. As a result, individuals and organizations start developing a positive attitude toward the various economic factors, such as investment, employment, and production. This process of reversal starts from the labor market.

Consequently, organizations discontinue laying off individuals and start hiring but in limited number. At this stage, wages provided by organizations to individuals is less as compared to their skills and abilities. This marks the beginning of the recovery phase.

In recovery phase, consumers increase their rate of consumption, as they assume that there would be no further reduction in the prices of products. As a result, the demand for consumer products increases.

In addition in recovery phase, bankers start utilizing their accumulated cash balances by declining the lending rate and increasing investment in various securities and bonds. Similarly, adopting a positive approach other private investors also start investing in the stock market As a result, security prices increase and rate of interest decreases.

Price mechanism plays a very important role in the recovery phase of economy. As discussed earlier, during recession the rate at which the price of factor of production falls is greater than the rate of reduction in the prices of final products.

Therefore producers are always able to earn a certain amount of profit, which increases at trough stage. The increase in profit also continues in the recovery phase. Apart from this, in recovery phase, some of the depreciated capital goods are replaced by producers and some are maintained by them. As a result, investment and employment by organizations increases. As this process gains momentum an economy again enters into the phase of expansion. Thus, a business cycle gets completed.

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The Four Stages Found in a Business Cycle Essay

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A business cycle

Major economic variables used in defining business cycles, characteristics of recession based on key economic variables, the united states recessions from 1960-2010, and the key causative factors, the proposed and legislated specific fiscal policies to curb recessions, effectiveness of the fiscal policies, jobless recovery.

Basically, a business cycle refers to a progression of economic activities found within a state’s economy which are classically characterized through four phases namely recession, growth, decline and recovery that reiterate over time. However, economists note that comprehensive business cycles tend to fluctuate in lengths (Knoop, pp. 12). This implies that the durations of the business cycles might fall within a time span of virtually two to about twelve-years with nearly all cycles averaging almost six years in extent. Actually, the phrase ‘business cycle’ is primarily correlated to larger national, industry- wide and regional business trends.

Heightened research on what caused the business cycles led to the determination of various factors that primarily shaped the disposition and direction of regional, industry, and national specific economies. The distinguished key variables that were used in defining the business cycles included investment spending, governments spending, as well as imports and exports fluctuations. The variation in the investment spending volatility was actually deemed to be amongst the most essential business cycles factors. For instance, in the United States business cycles, investment spending was proved to be a persistently volatile factor of the total or aggregate demand (Knoop, pp.11). It tends to vary more from period to period as compared to the largest aggregate demand component known as the consumption expenditure.

Fluctuation in government spending is yet another factor that caused business cycles fluctuations. Being widely considered as a stabilizing economic force rather than the basis for economic instability or fluctuations, variations in government spending can significantly impact the business cycles. Finally, an economy’s imports and exports fluctuations can also cause eminent disturbances in the business cycle because the net export constitutes an economy’s aggregate demand.

In the business cycles, a recession is usually characterized by declining trends in economic activities. The aggregate demands are perceived to be very low and this is attributable to the fluctuations in the key economic variables namely the net exports, government spending, and investment spending. Basically, the investment spending volatility is a key factor that has for long dictated the US business cycles. In fact, during the periods when an economy is in a recession, the investment levels are seen to have declined. For instance, the 1929 great depression was a result of the collapse in investment spending which saw a decline in the aggregate demand. The deceleration in the investment during the recession periods further causes a downward response in the sales trends (Knoop, pp.106). When an economy is in a recession, investment spending is seen to decline hence causing the overall output to decline.

Conversely, during World War II for example, increased government spending resulted in the expansion of economic activities. However, the recession periods that came afterwards, between 1953 and 1954 was evidently attributable to the government spending reductions. Therefore, a recession is marked by a decrease in the level of government expenditure which in turn lowers the aggregate demand. On the other hand, fluctuations experienced in the imports and export levels also mark periods in the business cycle that can possibly lead to recession. During recession periods, the levels of imports seem to surpass the overall levels of exports and this gives rise to negative net exports. Since net export is a component of an economy’s aggregate demand, during the recession the level of net export declines causing a general decrease in the level of economic growth as well as the domestic income. Moreover, as recession persists, the demand for foreign goods and services in the domestic economy reduces thereby creating minimal exportation opportunities.

According to Knoop (65) the United States has experienced various economic recessions from1960 since 2010. For instance, in 1960¸ a recession which lasted for about ten months starting from April 1960 was apparent. The gross domestic product (GDP) was -1.9% in the second quarter and -5.1% in the fourth quarter. During this period, unemployment rose and attained a peak in May 1961 of 7.1%. Another recession was experienced in 1970. Although it was moderately mild, it lasted for eleven months causing the GDP to go down in two quarters (Q). In Q1, GDP was -0.7%; in Q2, GDP was 0.7%; Q3 had a GDP of 3.6% and in Q4, the GDP was -4.2%. In December 1970, the unemployment rate peaked at approximately 6.1%.

Between 1973 and 1975, OPEC was blamed for yet another recession that lasted for 16 months.

This was attributed to the quadrupling prices in 1973; the printing of more by the US after going off the gold-standard; the institution of wage prices controls by President Nixon which reduced the demand for commodities due to high prices and the laying-off of employees due to high wage rates. There were three successive quarters of depressing GDP growth rates: In Q3 (1974), GDP was -39% and Q4 had a GDP of -1.6%. In 1975, Q1 had a GDP of -4.8% while the overall unemployment rate reached nine percent in May 1975. This was two months later after the recession had ended (Knoop, pp. 6).

The 1980 to 1982 recessions went for twenty two months, and it was partially attributed to the oil embargo in Iran which caused prices to go up. The business spending was reduced as a result of the raised rates of interest. Negative GDP was recorded in six out of twelve quarters with -7.9% being the worst experienced in Q2 of 1980. In Q1 of 1982, the unemployment rate rose from 6.4% (1981) to 10.8% in 1982. Conversely, the loans and savings crisis of 1989 caused another recession between 1990 and 1991 that lasted for eight months. In 1990’s Q4, a -3.5% GDP was recorded whereas in Q1 of 1991, the GDP was -1.9%. The preceding periods went without a recession until another eight months recession arose in fiscal 2001.

The booms and busts in the internet businesses that were caused by Y2K scare significantly contributed to the recession. The September 11 attacks also aggravated the recession which forced the economy to contract for two quarters. For instance, Q1 had -1.3% while Q3 had -1.1% with unemployment reaching 5.7% during this recession. The unemployment further rose in 2003 to 6%. Ever since the great-depression, the worst recession was witnessed between 2008 and 2009. The entire economy shriveled in five consecutive quarters (Knoop, pp.65). In fact, two quarters contracted above 5%. Nevertheless, in the third quarter of 2009, the recession ended when a positive GDP was realized after an economic stimulus-spending. In the fiscal 2008, Q1= -0.7%; Q2=1.5%; Q3=-2.7% and Q4=-5.4%. In 2009, Q1=-6.4% and Q2=-0.7%. The major cause of the recession was the sub-prime mortgage crisis that brought about a universal banking credits-crisis.

The proposed expansionary policies during the 1980s involved the tax reductions and the enlargement in the government expenses especially increased spending in defense. While these policies were close to that applied in the 1960s it supported the supply side argument. The argument was that reduction in the rate of tax especially those with high margins will create employment. For example, the policy brought back the venture tax credit which encouraged savings. With the increased employment rates resulting from the increased investment by firms there is a firm indication that the long-run aggregate supply curve will shift to the right very rapidly and thus invigorating the economy.

The government expansionary policies were again proposed in the 2000s with the president arguing for large tax reductions. The tax reductions were later implemented with the increased spending on defense and other state welfare policies such as Medicare and Medicaid. The increased government expenditure coupled with huge reduction in tax rates stimulated the economy but only temporarily. Conversely the government deficits continued to swell even though the economy grew slightly with the increase in government expenditure.

The proposed slicing of taxes as well as enlarged government expenditure resulted in the doubling of federal deficits. Deficits and government spending are inversely proportional as can be evidenced by the fiscal policies that were implemented by the governments. The economic growth caused by these expansionary policies was very temporary. The continued fall of the economy into recession especially in the late 2000s raised many questions on the use of these fiscal policies. To counter the recession fiscal policies must be accompanied by adequate and appropriate expansionary financial policies (Fuller & Geide-Stevenson, n.p).

During the recession periods, an economy usually down surges in its GDP. However, to recover from this, most economies tend to put measures in place to help return the gross domestic product (GDP) to its normal state without necessarily creating any new jobs or even restoring jobs for the individuals who lost their work. This is what is normally termed as a jobless recovery. The 2000-2002 recessions brought about a downturn in the labor market. In essence, the labor market became much weaker despite viable steps taken to generate jobs and stimulate the entire economy. For example, after the recession had ended in fiscal 2001, the unemployment level significantly rose to 6.0% in 2002. During this period, the economy reached its peak yet jobless rolls expanded by almost 2.8 million (International Monetary Fund, pp.17).

After recovering from the 2008-2009 recessions, there are still doubts whether economies can adequately recover to re-attain full employment. For instance, in spite of the GDP recoveries, employment rates have increasingly lagged behind whereby between fiscal 2007 and October 2009, almost 8 million jobs were lost and have never been recovered in the US. The employed residents’ ratio reduced after the recovery to 58% in 2009 from the 63% recorded in 2007.

Knoop , Todd, A. Recessions and depressions: understanding business cycles . Santa Barbara, California: ABC-CLIO, 2010

International Monetary Fund (IMF) . World economic outlook, October 2009: sustaining the recovery . Washington, DC: International Monetary Fund, 2009.

Fuller, D. and Geide-Stevenson, D. “Consensus among Economists: Revisited,” Journal of Economic Education 34, no. 4 (2003): 369–87.

• The Analysis Professor Garrison’s Paper
• Customer Satisfaction Approaches
• Monopolistic Competitive Firms
• “How the Federal Reserve Fights Recessions” by Anderson
• The Essence of Recession and Its Worth
• Ban on Smoking in Enclosed Public Places in Scotland
• Western Australia Lifts Its Ban on Uranium Mines
• Aspects of Microeconomics
• “How Apple Plays the Pricing Game” by Ben Kunz
• The Tea Market in India and Tea Prices
• Chicago (A-D)
• Chicago (N-B)

IvyPanda. (2022, January 9). The Four Stages Found in a Business Cycle. https://ivypanda.com/essays/the-four-stages-found-in-a-business-cycle/

"The Four Stages Found in a Business Cycle." IvyPanda , 9 Jan. 2022, ivypanda.com/essays/the-four-stages-found-in-a-business-cycle/.

IvyPanda . (2022) 'The Four Stages Found in a Business Cycle'. 9 January.

IvyPanda . 2022. "The Four Stages Found in a Business Cycle." January 9, 2022. https://ivypanda.com/essays/the-four-stages-found-in-a-business-cycle/.

1. IvyPanda . "The Four Stages Found in a Business Cycle." January 9, 2022. https://ivypanda.com/essays/the-four-stages-found-in-a-business-cycle/.

Bibliography

IvyPanda . "The Four Stages Found in a Business Cycle." January 9, 2022. https://ivypanda.com/essays/the-four-stages-found-in-a-business-cycle/.

3.3 Business Cycles and Economic Activity

Learning outcomes.

By the end of this section, you will be able to:

• Outline the stages of the business cycle.
• Identify recessionary and expansionary periods.

What Is the Business Cycle?

Although the US economy has grown significantly over time, as seen in Figure 3.12 , the growth has not occurred at a constant, consistent pace. At times, the economy has experienced faster-than-average growth, and occasionally the economy has experienced negative growth.

The percentage change in real GDP for each quarter is shown in Figure 3.13 . For any quarter in which real GDP is growing, the percentage change will be positive. When the growth rate of real GDP is negative, the economy is shrinking.

Figure 3.14 is an illustration of the growth of GDP over time. There has been a definitive long-term upward trend in GDP, but it has not been in a straight line. Instead, the economy has expanded much like the curve; periods of quick growth are followed by slower or even negative growth. These alternating growth periods are known as the business cycle .

Stages of the Business Cycle

The business cycle consists of a period of economic expansion followed by a period of economic contraction. During the period of economic expansion , GDP rises. Employment expands as businesses produce more; conversely, unemployment falls. Other measures of economic growth may include increased new business starts and new home construction. The economy is said to be “heating up.” As the expansion continues, inflation often becomes a concern.

Fast-paced economic expansion is not sustainable. Eventually, growth slows and unemployment rises. The economy has moved from expansion to contraction when this occurs. The point at which the business cycle turns from expansion to contraction is known as the peak . The point at which the contraction ends and the economy begins to expand again is known as the trough . The length of one business cycle is measured by the time from one trough to the trough of the next cycle, as shown in Figure 3.15 .

Often, the contraction is referred to as a recession . A private think tank, the National Bureau of Economic Research (NBER) , tracks the business cycle in the United States. The NBER is the entity that officially declares recessions in the United States. Historically, a recession was defined as two consecutive quarters of declining GDP. Today, the NBER defines a recession in a broader, less precise manner; it will declare a recession when there is a significant decline in economic activity that is spread across the economy and lasts for at least a few months. 8 Measures of real income, employment, industrial production, and wholesale and retail sales are considered in addition to real GDP.

Link to Learning

National bureau of economic research.

The National Bureau of Economic Research was founded in 1920 to create measures of economic activity that could be used in public policy discussions. It is a private, nonpartisan organization that conducts research that is followed by businesses and the public sector. You can find out more about the NBER and view many of its research papers by visiting its website .

Historical Trends

The NBER has identified business cycle peaks and troughs in data going back to the mid-19th century. Figure 3.16 lists each of these cycles, denoting the months of peaks and troughs. We see a repetition of the economic behavior—an expansion, a peak, a recession, and a trough, followed by yet another expansion, peak, recession, and trough. The cycles are events that repeatedly occur in the same order.

However, the cycles are not identical; the lengths of the cycles vary greatly. On average, the contractions have lasted about 17 months and expansions have lasted about 41 months. The typical business cycle has been about 4.5 years long.

At the time of this writing, the United States is in an economic recession. 9 The previous trough was in June 2009. From the summer of 2009 through February 2020, the US economy was in the expansionary phase of the business cycle. This expansion peaked in February 2020, when the economy fell into a contractionary period associated with the COVID-19 pandemic. This 128-month expansion is the longest expansion in US history. Only two other expansions have lasted for over 100 months: the 120-month expansion that ran through the 1990s and the 106-month expansion that ran during the 1960s. The longest recessionary period on record is the 65-month recession that occurred during the 1870s. The recession that began in 1929 was the second-longest recession in US history. At 43 months long, this recession that ended in 1933 was so severe that it has been called the Great Depression. 10

• 7 Data from US Bureau of Economic Analysis. “Gross Domestic Product (GDP).” FRED. Federal Reserve Bank of St. Louis, accessed July 7, 2021. https://fred.stlouisfed.org/series/GDP
• 8 National Bureau of Economic Research. “Business Cycle Dating Committee Announcements.” July 19, 2021. https://www.nber.org/research/business-cycle-dating/business-cycle-dating-committee-announcements
• 9 National Bureau of Economic Research. “Business Cycle Dating Committee Announcements.” July 19, 2021. https://www.nber.org/research/business-cycle-dating/business-cycle-dating-committee-announcements
• 10 National Bureau of Economic Research. “US Business Cycle Expansions and Contractions.” Last updated July 19, 2021. https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions

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Access for free at https://openstax.org/books/principles-finance/pages/1-why-it-matters

• Authors: Julie Dahlquist, Rainford Knight
• Publisher/website: OpenStax
• Book title: Principles of Finance
• Publication date: Mar 24, 2022
• Location: Houston, Texas
• Book URL: https://openstax.org/books/principles-finance/pages/1-why-it-matters
• Section URL: https://openstax.org/books/principles-finance/pages/3-3-business-cycles-and-economic-activity

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