Business cycle
The business cycle describes recurring expansions and contractions in economic activity, employment, income and spending, without implying a fixed or mechanically predictable timetable.
Definition
The business cycle is the fluctuation of aggregate economic activity around its longer-term trend, conventionally described through expansion, peak, contraction and trough phases.
Cycle phases
| Phase | General pattern | Possible signals |
|---|---|---|
| Expansion | Broad activity and employment rise | Stronger production, income and credit |
| Peak | Expansion reaches a high point | Capacity pressure and slowing momentum |
| Contraction | Activity declines across important sectors | Falling output, employment or spending |
| Trough | Decline reaches a low point | Stabilization before renewed expansion |
Indicators
Leading
- New orders
- Financial conditions
- Expectations surveys
Coincident
- Production and sales
- Employment
- Real income
Lagging
- Unemployment duration
- Credit losses
- Some inflation measures
Drivers and propagation
Cycles can begin or intensify through demand changes, productivity and supply shocks, commodity prices, monetary and fiscal policy, credit conditions, asset-price corrections or external events. Balance sheets propagate shocks: falling income can weaken borrowers, tighten lending, reduce spending and create further losses. Inventory adjustment, delayed investment and expectation changes can amplify the movement.
Policy and interpretation
A recession is a broad and material decline in activity, not merely weak growth. The popular rule of two consecutive quarters of falling real GDP is a shorthand rather than a universal definition. Stabilization policy can soften a downturn, but real-time diagnosis is difficult because data arrive with lags and are revised. Potential output and the output gap are estimates rather than directly observed quantities.
Related concepts
Sources and further reading
View sources and editorial notes
- National Bureau of Economic Research, business-cycle dating methodology.
- OECD, composite leading indicators and business-cycle analysis.
- International Monetary Fund, World Economic Outlook methodology and analysis.
Editorial note: Cycle dates and turning points are normally identified using multiple indicators and may only become clear after revisions. This entry does not offer a real-time recession forecast.