what is a business cycle 
business cycles are a type of fluctuation found in the aggregate economic activity of a nation a cycle that consists of expansions occurring at about the same time in many economic activities followed by similarly general contractions this sequence of changes is recurrent but not periodic the business cycle is also called the economic cycle understanding the business cyclein essence business cycles are marked by the alternation of the phases of expansion and contraction in aggregate economic activity and the co movement among economic variables in each phase of the cycle aggregate economic activity is represented by not only real i e inflation adjusted gdp a measure of aggregate output but also the aggregate measures of industrial production employment income and sales which are the key coincident economic indicators used for the official determination of u s business cycle peak and trough dates popular misconceptions are that the contractionary phase is a recession and that two consecutive quarters of decline in real gdp an informal rule of thumb means a recession it s important to note that recessions occur during contractions but are not always the entire contractionary phase also consecutive declines in real gdp are one of the indicators used by the nber but it is not the definition the organization uses to determine recessionary periods 12on the flip side a business cycle recovery begins when that recessionary vicious cycle reverses and becomes a virtuous cycle with rising output triggering job gains rising incomes and increasing sales that feedback into a further rise in output the recovery can persist and result in a sustained economic expansion only if it becomes self feeding which is ensured by this domino effect driving the diffusion of the revival across the economy of course the stock market is not the economy therefore the business cycle should not be confused with market cycles which are measured using broad stock price indices measuring and dating business cyclesthe severity of a recession is measured by the three d s depth diffusion and duration a recession s depth is determined by the magnitude of the peak to trough decline in the broad measures of output employment income and sales its diffusion is measured by the extent of its spread across economic activities industries and geographical regions its duration is determined by the time interval between the peak and the trough an expansion begins at the trough or bottom of a business cycle and continues until the next peak while a recession starts at that peak and continues until the following trough the national bureau of economic research nber determines the business cycle chronology the start and end dates of recessions and expansions for the united states accordingly its business cycle dating committee considers a recession to be a significant decline in economic activity spread across the economy lasting more than a few months normally visible in real gdp real income employment industrial production and wholesale retail sales 3the great depression featured many recessions one of which lasted for 44 months 4the dating committee typically determines recession start and end dates long after the fact for instance after the end of the 2007 09 recession it waited to make its decision until revisions in the national income and product accounts were released on july 30 and aug 27 2010 and announced the june 2009 recession end date on sept 20 2010 5u s expansions have lasted longer than u s contractions on average between 1945 and 2019 the average expansion lasted about 65 months the average recession lasted approximately 11 months 6between the 1850s and world war ii the average expansion lasted about 26 months and the average recession about 21 months the longest expansion was from 2009 to 2020 which lasted 128 months 6stock prices and the business cyclethe biggest stock price downturns tend to occur but not always around business cycle downturns e g contractions and recessions for example the dow jones industrial average and the s p 500 took steep dives during the great recession the dow fell 51 1 and the s p 500 fell 56 8 between oct 9 2007 to march 9 2009 7there are many reasons for this but primarily it is because businesses assume defensive measures and investor confidence falls during contractionary periods many events occur before people in an economy are aware they are in a contraction but the stock market trails what is going on in the economy so if there is speculation or rumors about a recession mass layoffs rising unemployment decreasing output or other indications businesses and investors begin to fear a recession and act accordingly businesses assume defensive tactics reducing their workforces and budgeting for an environment of falling revenues investors flee to investments known to preserve capital demand for expansionary investments falls and stock prices drop it s important to remember that while stock prices tend to fall during economic contractions the phase does not cause stock prices to fall fear of a recession causes them to fall 