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What is a Business Cycle?

The business cycle refers to an economy's periodic patterns of growth, recession, and recovery.

How Does a Business Cycle Work?

An expanding economy is characterized by low unemployment, high productivity, and high consumer spending. When there is a decline in productivity, business revenues start to decline. Companies, consequently, reduce their workforces to cut costs. This results in rising unemployment and lower consumer confidence and spending, which are all hallmarks of a recession.

As the recession weakens, incremental increases in productivity and revenues lead to an economic recovery. The unemployment rate is gradually reduced as companies begin hiring again. A decreasing unemployment rate leads to an increase in consumer confidence and spending, and the economy begins expanding again.

Why Does a Business Cycle Matter?

Business cycles are of particular interest to economists and policy makers. Government intervention is often introduced during recessionary periods in an effort to hasten recovery. By studying the historical patterns of economic expansion and contraction, it may be possible to understand and forecast future economic trends.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.