What Is the Economic Cycle? Definition and Example
The four phases of the economic cycle, how each tends to affect stocks and sectors, and how to judge where the economy is without guessing.
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What Is the Business Cycle? Definition and Example
The business cycle is the economy’s repeating pattern of expansion and contraction. Here are the phases, how long they have lasted, and how stocks and sectors behaved.
Key takeaways
- The business cycle is the economy’s alternation between expansion (growth) and contraction (recession), with a peak and a trough marking the turns. In the US, the NBER dates them.
- Since 1945, US contractions averaged 10.3 months and expansions 64.2 months, according to the NBER.
- Recessions and bear markets overlap but are not the same: Hartford Funds counts 27 S&P 500 bear markets since 1928 against 15 recessions.
- Sectors react differently. In the 2007–09 crisis, the median financial stock in Exent’s data fell 76% versus 42% for consumer staples (defensive) stocks.
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What is the business cycle?
It is the pattern of rising and falling activity across the whole economy: output, jobs, incomes and spending. The cycle has four phases: expansion, peak, contraction and trough. The terms business cycle and economic cycle are used interchangeably.
How is the business cycle measured?
In the US, the National Bureau of Economic Research names peaks and troughs after the fact, using a broad set of data rather than the “two negative quarters of GDP” shortcut. Its dates are often announced months after the turn.
Example: recent US cycles
| Peak | Trough | Contraction | Following expansion |
|---|---|---|---|
| Jul 1990 | Mar 1991 | 8 months | 120 months |
| Mar 2001 | Nov 2001 | 8 months | 73 months |
| Dec 2007 | Jun 2009 | 18 months | 128 months |
| Feb 2020 | Apr 2020 | 2 months | From Apr 2020 |
Source: NBER. Cycles vary widely in length; there is no fixed timetable.
Why does it matter for a self‑directed investor?
Earnings follow the cycle, so sectors tied to spending and credit tend to swing more than staples, healthcare and utilities. Stocks often move before the economy does, which makes the cycle hard to trade on. See how stocks behave in a recession and soft vs hard landing.
Common mistakes
- Waiting for the official call. By the time a recession is dated, markets have usually moved.
- Equating recessions with bear markets. Many bear markets came without a recession.
- Assuming cycles repeat on schedule. The last four expansions ran from 73 to 128 months or more.
Frequently asked questions
Expansion, peak, contraction and trough. A contraction long and broad enough is called a recession.
There is no fixed length. NBER data show postwar US expansions averaged about 64 months and contractions about 10 months.
The National Bureau of Economic Research’s Business Cycle Dating Committee, usually months after the fact.
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Educational content, not investment advice. Examples are illustrative; past performance does not guarantee future results.