I. The Business Cycle

Phases of the Business Cycle
Economies usually have long-term secular trends, such as a certain rate of expansion for the labor force and/or the general population. One feature of market economies is that economic activity sometimes rises above the long-term trend line, while at other times it falls below.

Figure 4.2

A business peak, or boom, occurs when unemployment is low, incomes are high and businesses are operating at full capacity. When aggregate economic conditions began to slow, the business cycle is said to be in a contraction, or recessionary phase. Sales begin to fall, and unemployment starts to rise. The low point of the contraction phase is called the recessionary trough. The business cycle begins the expansionary phase after the low point is reached and business conditions began to improve. Business sales improve, and the unemployment rate begins to decline. Another boom will follow, and the cycle will begin anew.

Conditions during the low point are referred to as a recession. Many economists define a recession as being a decline in Gross Domestic Product over two or more quarters. Severe recessions (both in length of time and severity of the contraction) are referred to as depressions.



Key Labor Market Indicators

Related Articles
  1. Markets

    Macroeconomics: The Business Cycle

    By Stephen Simpson The business cycle is the pattern of expansion, contraction and recovery in the economy. Generally speaking, the business cycle is measured and tracked in terms of GDP and ...
  2. Trading

    Market Cycles: The Key To Maximum Returns

    You need to understand the various phases of the market cycle to avoid bubbles and make the best investments.
  3. Trading

    Recession: What Does It Mean To Investors?

    Understanding the business cycle and your own investment style can help you cope with an economic decline.
  4. Markets

    Business Cycle

    The business cycle refers to the fluctuations in economic activity that an economy experiences over a period of time. It consists of expansions, or periods of economic growth, and contractions, ...
  5. Investing

    Business Cycle Investing: Ratios to Use For Each Cycle

    Examine economic and sector performance over the business cycle to determine which ratios are most important for each phase of the cycle.
  6. Trading

    Cashing In On A Commodities Boom

    They're hard to predict, but commodities cycles provide valuable information for traders.
  7. Markets

    Recession And Depression: They Aren't So Bad

    Financial downturns are part of the economic cycle and may have important long-term benefits.
  8. Markets

    Sector Rotation: The Essentials

    We look at how the market signals impending economic cycles and sector performance during each stage.
  9. Managing Wealth

    Tips For Recession-Proofing Your Portfolio

    Find out what to do when the sun sets on a burgeoning market.
  10. Markets

    What is a Boom And Bust Cycle?

    The boom and bust cycle of an economy is the period over which it expands and contracts.
Trading Center