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What is a Business Cycle?

What is a Business Cycle?

Business cycles consist of alternating periods of expansion and contraction in the level of economic activity experienced by market-oriented economies.

  • Business cycles are a type of fluctuation in aggregate economic activity in market-oriented economies.
  • They consist of simultaneous expansions in many economic activities, followed by similarly general recessions.
  • This sequence of changes is recurrent but not periodic –a business cycle can last from a year to more than a decade.
  • A business cycle cannot be divided into shorter cycles of similar character and magnitude.

Growth rate cycles – alternating periods of accelerating and decelerating economic growth – occur within business cycles. Growth rate cycle downturns can culminate in either recessions or soft landings that are followed by a reacceleration in economic growth. These cycles are especially relevant to cyclical fluctuations in securities markets.

Inflation cycles consist of alternating periods of rising and falling inflation. Inflation cycle downturns have a degree of correspondence with economic slowdowns, but sometimes begin before, rather than after, the start of a slowdown.

The Durability of the Cycle

During long periods of economic expansion, conviction inevitably grows that the business cycle is “obsolete,” because the economy has entered a “new era.”

Download and read “Business Cycle's Demise Greatly Exaggerated”.

For this reason, the robustness and objectivity of ECRI's analytical framework is essential to any informed decision-making process. The reality is that, as long as we have free-market economies and human nature is prone to bouts of greed and fear, the business cycle will endure.

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