The business cycle is a fluctuation of downward and upward economic activity that occurs over a period of time. These fluctuations occur in four widely accepted phases and tend to be centered upon a country’s long-term gross domestic product growth trend. The business cycle is usually measured in the growth rate of real gross domestic product. Despite the word “cycle” being in the name, there is no predictable amount of time that each phase of the business cycle will last. The four phases of the business cycle are expansion, crisis, recession, and recovery.
- During expansion, an economy sees increases in prices and production, and interest rates remain low.
- A crisis is not clearly defined, but events such as a stock market crash or multiple major firm bankruptcies can trigger a crisis.
- During a recession, an economy experiences high interest rates, and declines in prices and production.
- During recovery, general production levels return to normal, the stock market returns to typical levels, and the economy re-stabilizes.
This cycle tends to continue, up and down, for years at a time. Analyses of past business cycles have identified cycles lasting anywhere from three to five years, seven to 11 years, and even cycles as long as 45 to 60 years. Theories behind the major drivers of business cycles include investment, credit, technological shocks, external causes, political decisions, commodities, the yield curve, and even the banking system as a whole.