Business Cycle

The business cycle is the natural fluctuation in economic growth that happens over a long period of time. All business cycles are characterized by a number of different stages: Expansion, Peak, Recession, Depression, Trough, and Recovery.

Expansion

Expansion is the first stage in the business cycle. During this stage, there’s an increase in economic growth indicators such as employment, incomes, production, sales and demand. The economy has a steady flow in the money supply and investment is booming.

Peak

The peak is the “top” of a business cycle, the turning point at which output stops increasing and starts decreasing. This is a stage when the economy hits the top, having reached the highest level of growth. Prices are at their highest and economic indicators stop growing. Many people start restructuring their budgets as the economy’s growth starts to reverse.

Recession

Recession is a decline in economic growth. In this stage, the output is decreasing and unemployment rates are increasing. Production slows down, sales start to decrease because of a decline in demand, and incomes become stagnant or decline.

Depression

At the depression stage, economic growth continues to drop while unemployment keeps rising and production plummets. Consumers and businesses find it hard to secure credit, and trade is reduced. This is when the number of bankruptcies starts increasing. Consumer confidence and investment levels also drop.

Trough

The trough is the “bottom” of this decline. This stage is the turning point between a recession and an expansion, the end point of the depression process. During a trough in the business cycle, output bottoms out and begins to increase again, leading an economy into the recovery.

Recovery

Recovery is where economic growth moves away from the low point. Low prices start to increase, employment and production also start to rise, and lenders start to open up their credit coffers. This stage marks the end of one business cycle.