What Are the Characteristics of Each Stage of the Business Cycle?

A business cycle or economic cycle comprises the fluctuations in economic activity. According to the Corporate Finance Institute, a business cycle showcases the upswings and downswings in the gross domestic product (GDP) over time. A business cycle is said to be complete when the economy goes through a contraction and expansion in sequence. While the expansion reflects a rapid economic growth rate, the contraction reflects an economic recession. The important business cycle phases are expansion, peak, recession, depression, trough and recovery.

Characteristics of the Expansion Stage

The economic indicators for employment, demand and supply of goods, income and wages grow significantly during the expansion stage. People have higher disposable income and clear their financial obligations on time. The velocity of money supply and the flow of money into investments, including equity, bonds, real estate and gold, is also extremely high in this stage.

Characteristics of the Peak Stage

The peak phase reflects the saturation of economic activity. The maximum possible growth is attained, and the economic growth indicators don’t grow further. The prices of products and services reach their peak. According to macroeconomists, the goal of the economy is to have a low unemployment rate. The peak stage helps economies achieve a low unemployment rate that often lies somewhere between 2 and 5 percent. The demand for products in the peak stage is so high that organizations employ additional workers to increase the output. The end of this stage marks the reversal trend in economic growth.

Characteristics of the Recession Stage

The economy enters a recession stage as the demand for products and services falls rapidly. Organizations often don’t recognize the reversal and end up operating at full capacity during the recession stage too. This results in excess supply and a fall in prices. The economic indicators such as employment, wages and income start to fall immediately after the economy enters a recession stage.

Sometimes, economies continue to prolong slow growth without entering into a recession. This stage is called a growth recession. Growth recession is a term used to describe an economic situation in which the economic growth is slow but not sufficiently severe to call a recession. According to Nasdaq, the U.S economy enters into a growth recession state when its GDP growth rate stays between 0 and 2 percent for a prolonged period. A growth recession is a situation in which the percentage change in real GDP always remains positive. The unemployment rates continue to go down in the growth recession stage too.

Characteristics of the Depression Stage

A prolonged recession causes the economy to enter a depression stage. In this stage, the demand for products and services falls further. A depression forces companies to reduce production activities and give pink slips to employees. Depressions are often characterized by a drop in GDP of at least 10 percent or a prolonged recession of more than three years. For example, the economy of the United States underwent the Great Depression that started in 1929 lasted until the late 1930s.

Characteristics of the Trough Stage

During the trough stage, all economic indicators reach their lowest point. The economic growth rate, demand and supply of goods, and employment rate reach their lowest possible level. This is the negative saturation point where trend reversal takes place. Organizations that survive through the trough stage flourish when the economy bounces back to the recovery path.

Characteristics of the Recovery Stage

The recovery stage is where the turnaround of the economy happens. Demand starts to come back as the prices for the products are at their lowest. Organizations begin to make arrangements to meet the steadily increasing demand by hiring resources and procuring additional raw materials. The employment rate starts to rise steadily, bringing a positive outlook to the economy. The business cycle is said to be complete when the economy crosses the recovery stage and enters the expansion stage.