In simple terms, the business cycle is the up-and-down fluctuations in economic activity that is measured by changes in real GDP and other economic indicators over a certain period of time. No two business cycles are the same, although their phases have similar characteristics.
What are the four phases of the business cycle?
- Expansion: A pickup in economic activity that is defined by high growth, low unemployment and rising prices. This is the period that runs from the trough to peak.
- Peak: The upper inflection point of a business cycle at which expansion gives way to contraction.
- Contraction: A slowdown in the pace of economic activity. This phase is defined by low or stagnant growth, high unemployment and declining prices. This runs on the down slope from the peak to the trough.
- Trough: The lowest point of a business cycle, which is an inflection point for the economy going from contraction back to expansion. This is the beginning of a recovery.
The National Bureau of Economic Research1 indicates that there have been 11 business cycles from 1945-2009 with the average length of those cycles lasting 69 months or just shy of 6 years. The average expansion lasted 58.4 months while the average contraction lasted 11.1 months. With the general consensus agreeing that the current cycle dates back to June 2009, this results in the current cycle lasting roughly 7.5 years. While the current cycle is getting long in the tooth by historic standards, we would point you to indicators like the Economic Research Institute Weekly Leading Index2 to help you read the tea leaves.
