What is the Economic Cycle?

Toni Henthorn

The economic cycle, or business cycle, refers to the repetitive but irregular up-and-down fluctuation of the aggregate economy between periods of growth, or expansion, and periods of contraction, or recession. Four different phases of activity spread out over a period of years -- the trough, the expansion or recovery, the peak, and the recession or contraction -- make up a business cycle. Merely flat points on the cycle, the peak and trough represent the maximum and minimum points of economic vigor, while recession and expansion are the moving periods of the economic cycle that reflect the trends in the financial climate, measuring the direction of the economy. The National Bureau of Economic Research gauges the overall health of the economy and determines whether the United States is in expansion, recession, or transition between the two by analyzing a variety of factors such as personal income levels, employment rates, sales volumes, and industrial production.

Expansion or economic recovery is the period of the economic cycle during which the economy climbs from a trough to a peak.
Expansion or economic recovery is the period of the economic cycle during which the economy climbs from a trough to a peak.

Expansion or economic recovery is the period of the economic cycle during which the economy climbs from a trough to a peak, characterized by an upsurge in business activity and an expansion in the gross domestic product. Recoveries vary in duration from one to ten years, with most lasting about three to four years. After a period of growth, the economy begins to run at maximum capacity with employment and wages reaching the highest levels and the gross domestic product peaking at its upper limit. At this point, the growth curve flattens, and then begins to turn downward, with income and employment levels declining. With wages and the prices of goods somewhat resistant to change, the economy significantly slows over an average of six to 18 months until it bottoms out at a through.

Economic indicators are statistics used by investors and the National Bureau of Economic Research to predict how well the economy will do in the future. Procyclic indicators, such as the GDP, shift in the same direction as the economy, while countercyclic indicators, such as the unemployment rate, run in the opposite direction of the economy. Indicators can also be leading, lagging or coincident, depending on whether the factors change before, after or at the same time as the economy. The United States Congress publishes seven broad categories of economic indicators each month, including information on total output, income and spending. Other important factors include wages, unemployment, security and credit markets, and federal finance.

Mainstream economy experts argue the question of whether economic cycles occur due to internal causes within a capitalistic system, such as overproduction and poor consumer spending, or whether external factors, such as wars or natural disasters, shock the system, causing the fluctuation. The debate has significant consequences regarding government policy. Backers of the theory that internal factors cause the economic cycle support increased governmental intervention and regulation. Proponents of internal causes of the economic cycle champion less government intrusion and regulation. Alternatively, another set of models suggests that business cycles are the direct result of political decisions.

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