A standard cycle has four main phases: expansion, peak, recession , and trough. As consumer confidence starts to build, the economy experiences an expansion. Employment, sales, production, income, and other economic indicators increase. Then some type of economic event happens and indicators start to lag. This is the peak. Consumers typically become concerned about their finances and start saving more money and spending less, creating a recession. The same indicators that increased in the expansion now start to decrease. This continues until it hits rock bottom and rebounds. You can think of this like a wave of economic activity. The wave comes in, peaks, and descends until the next one comes in.
In a nutshell:
- Business cycles consist of concerted cyclical upswings and downswings in the broad measures of economic activity—output, employment, income, and sales.
- The alternating phases of the business cycle are expansions and contractions (also called recessions). Recessions start at the peak of the business cycle—when an expansion ends—and end at the trough of the business cycle, when the next expansion begins.
- The severity of a recession is measured by the three D’s: depth, diffusion, and duration, and the strength of an expansion by how pronounced, pervasive and persistent it is.