Economic Cycle

The economic cycle is the fluctuation of the economy between periods of expansion (growth) and contraction (recession). Factors such as gross domestic product (GDP), interest rates, total employment, and consumer spending, can help to determine the current stage of the economic cycle.

The four stages of the economic cycle are also referred to as the business cycle. These four stages are expansion, peak, contraction, and trough.

During the expansion phase, the economy experiences relatively rapid growth, interest rates tend to be low, production increases, and inflationary pressures build. The peak of a cycle is reached when growth hits its maximum rate. Peak growth typically creates some imbalances in the economy that need to be corrected. This correction occurs through a period of contraction when growth slows, employment falls, and prices stagnate. The trough of the cycle is reached when the economy hits a low point and growth begins to recover.

The monetarist school of economic thought ties the economic cycle to the credit cycle. Changes in interest rates can reduce or induce economic activity by making borrowing by households, businesses, and the government more or less expensive. Adding to the complexity of interpreting business cycles, famed economist and proto-monetarist Irving Fisher argued that there no such thing as equilibrium and therefore, cycles exist because the economy naturally shifts across a range of disequilibrium as producers constantly over- or under-invest and over- or under-produce as they try to match ever-changing consumer demands.

Since 1950, the average economic cycle in the U.S. has lasted roughly five and a half years, although these cycles can vary in length. Factors that are used to indicate the stages in the economic cycle include gross domestic product, consumer spending, interest rates, and inflation. The National Bureau of Economic Research (NBER) is a leading source for indicating the length of a cycle, as measured from peak to peak, or trough to trough.

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