What Is a Peak?
A peak is the highest point between the end of an economic expansion and the start of a contraction in a business cycle. The peak of the cycle refers to the last month before several key economic indicators, such as employment and new housing starts, begin to fall. It is at this point real GDP spending in an economy is at its highest level. The peak is the pinnacle of the business cycle and its opposite is the trough, which represents the lowest point in a business cycle.
- A peak is the highest point of a business cycle and is followed by a contraction and eventual trough.
- Peaks are called after the fact once economic indicators have confirmed that contraction has set in and isn't simply noise.
- Peak to peak business cycles have been lasting longer on average for the U.S. economy.
Understanding the Peak
The peak is one of the four phases in the business cycle. The business cycle has no specific order as it simply repeats, but the four phases are recovery/expansion, peak, contraction/recession, and trough. Business cycles are dated according to when the direction of economic activity changes and are measured by the time it takes for an economy to go from one peak to another.
Because economic indicators change at different times, it is the National Bureau of Economic Research (NBER) that ultimately determines the official dates of peaks and troughs in U.S. business cycles. On June 8, 2020, for example, the NBER announced that the U.S. economy had hit a peak in February 2020. The announcement of the peak represented the end of a 128 month expansion for the U.S. economy, making it the longest in U.S. history by 8 months.
How a Peak is Measured
Broadly speaking, a peak represents the top of any cycle. The term originates from physics, where it is defined as the maximum point in a wave or alternating signal. As applied to economics and finance, a peak represents the high point in a business or financial market cycle. A business cycle is primarily measured in terms of real gross domestic product (GDP), but it also draws upon changes in real income, employment, and industrial production figures. Economic expansions are measured by the increase in GDP from the trough to the peak of a cycle, and contractions are measured by the decrease in GDP from the peak to the trough.
The entire business cycle is measured from one peak or trough to the next. Since the end of World War II, the average U.S. business cycle has lasted 6 years from peak to peak. Business cycles are lasting longer now than in the past: the average is 4 to 5 years when the data going back to 1860 is included. The shortest peak to peak cycle was 18 months, from 1980 to 1981, and the longest ran from 2009 to 2020, marking over 10 years. Moreover, of the five peak-to- peak cycles lasting over 100 months, three of them have occurred since the 1980s.
Why Business Cycles Occur
There is considerable debate as to the causes of the business cycle and whether it has to occur at all. Fiscal policy certainly plays a large role, as does policymakers' desire for strong growth to ensure continued public support. During an expansion phase, an economy generates positive growth in output and employment. This is good for people in general, as growing employment means growing opportunities. As the expansion matures, however, the economy can overheat as it reaches peak growth, which is usually evidenced by rising inflationary pressures.
From this point, the cycle can turn over for various reasons. Often, the Federal Reserve attempts to tamp down inflation by raising interest rates in an effort to slow down investments and consumer spending. In turn, as growth slows, the economy may enter into a contraction phase.
These types of recessions tend to be manageable in size, although they cause job losses and periods of adjustment for businesses and households. In more extreme cases, and in particular when the expansion phase is the result of excess credit, there can be a more violent and uncontrolled correction that leads to a financial crisis. The recession of 2008-2009 was an example of how a massive buildup of debt and speculative investment are capable of triggering a very sharp recession.