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Economic Cycle

An economic cycle is the recurring pattern of expansion and contraction in a country's overall economic activity, measured over periods that typically span several years from one peak to the next.

What Is an Economic Cycle?

An economic cycle, also called a business cycle, is the up-and-down movement of gross domestic product (GDP) and related measures of activity, such as employment, industrial output, and spending, over time. Each cycle moves through a sequence of phases: an expansion, when output and jobs grow; a peak, where growth stops accelerating; a contraction, which is called a recession when it is deep or prolonged; and a trough, where activity bottoms out before the next expansion begins.

How the Cycle Works

Economists generally describe the cycle by its turning points. Expansions are often marked by rising consumer spending, business investment, and hiring, which can push up wages and prices. When demand grows faster than the economy can supply goods and services, inflation may rise. During a contraction the opposite tends to happen: sales slow, firms cut back on hiring and investment, and unemployment rises.

Cycles are irregular. Their length and strength vary widely, and no two are identical. Economists do not expect a fixed schedule, and identifying a turning point often takes months of data, since a single weak reading does not confirm a new phase.

What Causes Cycles

Several forces contribute to economic cycles. Changes in interest rates set by a central bank affect borrowing costs for households and businesses. Shifts in consumer and business confidence influence spending decisions. Financial conditions, such as the availability of credit, can amplify swings. External shocks, including oil price changes, natural disasters, or pandemics, can also trigger or deepen a downturn. Economists continue to debate the relative importance of each factor.

Why It Matters to Investors

Many investors watch the economic cycle because corporate profits, stock market returns, and bond yields tend to respond to it, though the relationship is imperfect. Stock prices often move ahead of the economy, so markets may begin to recover before economic data does. Understanding the cycle can help investors put short-term news in context, but it does not reliably predict exact timing, and it is only one of many factors to consider.

Updated October 22, 2026. For general education only; not financial, tax or legal advice.

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Related Terms

Gross Domestic Product (GDP)

Gross Domestic Product (GDP) is the total market value of all final goods and services produced within a country's borders over a given period, used as a broad measure of economic output.

Inflation

Inflation is the sustained rise in the general price level of goods and services over time, which reduces how much money can buy.

Interest Rate

An interest rate is the cost of borrowing money or the return earned on saving or lending it, expressed as a percentage of the principal amount over a set period.

Stock Market

The stock market is a collection of exchanges and over-the-counter networks where investors buy and sell shares of publicly traded companies, helping set prices through supply and demand.

Bond Yield

A bond yield is the annual return an investor earns from holding a bond, expressed as a percentage of its price, reflecting coupon income and any gain or loss relative to the amount paid.

Recession

A recession is a significant, widespread decline in economic activity that lasts for more than a few months, typically visible in falling output, employment, income, and spending.

Economic Expansion

An economic expansion is the phase of the business cycle in which a country's economic output, employment, and spending grow over a sustained period, following a trough and before a peak.

Monetary Policy

Monetary policy is the set of actions a central bank takes to manage money supply, credit conditions, and interest rates in order to pursue goals such as stable prices and employment.