What Is a Business Cycle?

Business Cycle Defined

The business cycle is the upward and downward motion of the economy.

The business cycle consists of six phases:

  • Peak
  • Recession
  • Depression
  • Trough
  • Recovery
  • Expansion.

The peak of the business cycle is when the economy has hit it’s max growth. The peak can usually be identified when the growth indicators for the market stop going forward and remain stagnant. Another identification is when companies restructure or enforce an employee hiring freeze. With the market remaining stagnant, businesses and the economy start contracting and this stage is classified as a recession. During this phase, unemployment rises, salaries remain the same or decrease, and general production slows dramatically. Should the recession continue, this could potentially lead to a depression. A depression is when production is at a minimum, unemployment continues to rise, and companies struggle to gain revenue and potentially go bankrupt.

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Business Cycle Phases

After a period of time, the depression hits the bottom which is classified as the trough.

The trough can be signaled by unemployment remaining level and businesses starting to see production levels increasing.

With prices being low, this can spark an increase in demand which will increase employment and production simultaneously.

This stage of the business cycle is called the recovery stage.

The last and final stage of the business cycle is the expansion phase.

In this phase, companies tend to hire employees at a faster rate, production and sales increase.

Also in this phase, people tend to pay their debts on time and investing in companies and the market is increasing.

The business cycle shows how the real gross domestic product fluctuates over a period of time going through phases of output increases and decreases.

Business Cycle FAQs

The business cycle is the cyclical upward and downward motion of the economy.
The business cycle consists of six phases: peak, recession, depression, trough, recovery, and expansion.
The business cycle shows how the real gross domestic product fluctuates over a period of time going through phases of output increases and decreases.
With the market remaining stagnant, businesses and the economy start contracting and this stage is classified as a recession. During this phase, unemployment rises, salaries remain the same or decrease, and general production slows dramatically.
The National Bureau of Economic Research (NBER) determines the start and end dates of recessions and expansions, typically long after the fact. The average lags in the announcement of recession start and end dates have been eight months for peaks and 15 months for troughs.
True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

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

True contributes to his own finance dictionary, 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, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.