Phases of the Business Cycle

There are 4 main phases in the business cycle, each being indicated in the graph as well.

Source: Intelligent Economist

(1) Expansion: The economy is growing. Output and incomes are rising while unemployment is falling. Businesses are investing more, consumer spending is increasing, and economic activity is increasing as a whole.

(2) Peak: At the peak, economic indicators reach their highest levels, signaling that while business confidence may be high, there are signs of inflationary pressures or bubbles that will soon bring the economy down. For this reason, the peak marks the transition point from expansion to contraction.

(3) Contraction: Also known as a recession or downturn, the contraction phase involves a decline in economic activity. Output contracts, businesses cut back on production, unemployment rises, and consumer spending slows down.

(4) Trough: The trough is the lowest point of the business cycle, and it marks the end of the contraction phase. Economic activity is at its lowest, and unemployment and output stabilize. While it is a period of economic hardship, it signals that an economic rebound is coming ahead.