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.
BREAKING DOWN Peak
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.
Broadly speaking, a peak represents the top of a 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.
Historically, economies and financial markets have gone through a wave pattern cycle of expansion exhibiting peak growth, contraction and minimum growth. The first point of the cycle, where growth is at a maximum, is referred to as the peak. In the United States, NBER is the authoritative voice on defining economic cycles. Typically measured by gross domestic product (GDP), economic expansions are measured from the trough to the peak of a cycle, and contractions are measured from the peak to the trough.
How Peaks Fit into U.S. Business Cycles
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 about five and a half years, and ranged from just several years up to 10 years. The shortest post-war cycle was in the early 1980s, from July 1980 to November 1982. The longest cycle went from March 1991 to November 2001.
Why Cycles Occur
During the expansion phase, an economy generates positive growth in output and employment. As the expansion matures, 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, if 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.