what is the economic cycle 
an economic cycle also known as a business cycle refers to economic fluctuations between periods of expansion and contraction factors such as gross domestic product gdp interest rates total employment and consumer spending can help determine the current economic cycle stage understanding the economic period can help investors and businesses determine when to make investments and when to pull their money out as each cycle impacts stocks and bonds as well as profits and corporate earnings investopedia mira norianstages of the economic cyclean economic cycle is the circular movement of an economy as it moves from expansion to contraction and back again economic expansion is characterized by growth and contraction including recession a decline in economic activity that can last several months four stages characterize the economic cycle or business cycle 1during expansion the economy experiences relatively rapid growth interest rates tend to be low and production increases the economic indicators associated with growth such as employment and wages corporate profits and output aggregate demand and the supply of goods and services tend to show sustained uptrends through the expansionary stage the flow of money through the economy remains healthy and the cost of money is cheap however the increase in the money supply may spur inflation during the economic growth phase the peak of a cycle is when growth hits its maximum rate prices and economic indicators may stabilize for a short period before reversing to the downside peak growth typically creates some imbalances in the economy that need to be corrected as a result businesses may start to reevaluate their budgets and spending when they believe that the economic cycle has reached its peak a correction occurs when growth slows employment falls and prices stagnate as demand decreases businesses may not immediately adjust production levels leading to oversaturated markets with surplus supply and a downward movement in prices if the contraction continues the recessionary environment may spiral into a depression the trough of the cycle is reached when the economy hits a low point with supply and demand hitting bottom before recovery the low point in the cycle represents a painful moment for the economy with a widespread negative impact from stagnating spending and income the low point provides an opportunity for individuals and businesses to reconfigure their finances in anticipation of a recovery measuring economic cycleskey metrics determine where the economy is and where it s headed the national bureau of economic research nber is the definitive source for marking the official dates for u s economic cycles relying primarily on changes in gdp nber measures the length of economic cycles from trough to trough or peak to peak 2since the 1950s a u s economic cycle on average lasted about five and a half years however there is wide variation in the length of cycles ranging from just 18 months during the peak to peak cycle in 1981 to 1982 up to the expansion that began in 2009 according to the nber two peaks occurred between 2019 and 2020 the first was in the fourth quarter of 2019 a peak in quarterly economic activity the monthly peak happened in a different quarter which was noted as taking place in february 2020 34this wide variation in cycle length dispels the myth that economic cycles are a regular natural activity akin to physical waves or swings of a pendulum but there is debate as to what factors contribute to the length of an economic cycle and what causes them to exist in the first place businesses and investors need to manage their strategy over economic cycles not so much to control them but to survive them and perhaps profit from them managing economic cyclesgovernments financial institutions and investors manage the course and effects of economic cycles differently during a recession a government may use expansionary fiscal policy and rapid deficit spending it can also try contractionary fiscal policy by taxing and running a budget surplus to reduce aggregate spending to prevent the economy from overheating during expansion 5central banks may use monetary policy when the cycle hits a downturn a central bank can lower interest rates or implement expansionary monetary policy to boost spending and investment during expansion it can employ contractionary monetary policy by raising interest rates and slowing the flow of credit into the economy 6during expansion investors often find opportunities in the technology capital goods and energy sectors when the economy contracts investors may purchase companies that thrive during recessions such as utilities consumer staples and healthcare businesses that track the relationship between their performance and business cycles can plan strategically to protect themselves from approaching downturns and position themselves to take maximum advantage of economic expansions for example if your business follows the rest of the economy warning signs of an impending recession may suggest you shouldn t expand you may be better off building up your cash reserves economic theorymonetarism suggests that government can achieve economic stability through their money supply s growth rate it ties the economic cycle to the credit cycle where changes in interest rates reduce or induce economic activity by making borrowing by households businesses and the government more or less expensive the keynesian approach argues that changes in aggregate demand spurred by inherent instability and volatility in investment demand are responsible for generating cycles when business sentiment turns gloomy and investment slows a self fulfilling loop of economic malaise can result less spending means less demand which induces businesses to lay off workers according to keynesians unemployment means less consumer spending and the whole economy sours with no clear solution other than government intervention and economic stimulus 7