Business Cycle

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  • What's the Business Cycle?
  • Measuring and Dating Business Cycles
  • The Varieties of Cyclical Expertise
  • Stock Prices and the Company Cycle

What Is a Business Cycle?

"Business cycles are a type of fluctuation found in the aggregate economic activity of nations...a cycle consists of expansions occurring at about precisely the same time in several economic activities, followed by similarly general recessions...this chain of changes is recurrent but not periodic." That description, from the 1946 magnum opus from Arthur F.

Essentially, business cycles are indicated with the alternation of the phases of growth and contraction in aggregate economic activity, and the comovement among economic variables in each stage of the cycle. Aggregate economic activity is represented by not only real (i.e., inflation-adjusted) GDP--a measure of aggregate output--but the aggregate measures of industrial production, employment, income, and earnings, which are the key coincident economic indicators used for the official determination of U.S. business cycle peak and trough dates.

A popular misconception is that a recession is defined only as two successive quarters of decline in real GDP. Especially, 2001 recessions and 1960 -- 61 failed to include two successive quarterly declines

A recession is actually a type of cycle, together with cascading declines in employment, output, income, and earnings that feed into a drop in output, spreading from business to industry and region to region. This domino effect is key to the diffusion of weakness across the market, forcing the comovement among these coincident economic indicators along with the recession's persistence.

If you want to see - What’s the Dow Jones Industrial Average (DJIA)?


A business cycle recovery starts when that cycle becomes a cycle, together with rising output triggering job gains, rising incomes, and increasing sales that feedback into a rise in output and reverses. The recovery can persist and result in sustained economic growth only if it will become self-feeding, which is ensured by this domino effect driving their revival throughout the economy's diffusion.


The stock market is not the market. Hence, the business cycle should not be confused with market cycles, that can be measured using broad stock price indices.


  • Business bicycles are comprised of concerted cyclical upswings and downswings in the broad measures of economic activity--lead, employment, income, and sales.
  • The alternating stages of the company cycle are both expansions and contractions (also known as recessions). Recessions start at the finish at the trough of the business cycle, even when the next expansion starts -- and the peak of the business cycle -- when an expansion ends.
  • The harshness of a recession is quantified by the 3 D: thickness, diffusion, and duration, and the strength of growth by just how pronounced, pervasive, and persistent it is.

Measuring and Dating Business Cycles

The severity of a recession is quantified by the 3 D's: depth, diffusion, and duration. The thickness of A recession is determined by the size of the peak-to-trough decline from the broad measures of earnings, income, employment, and output. Its diffusion is measured by the amount of its spread across businesses activities, and areas. The time interval between the peak and the trough determines its length.

In similar manner, an expansion's potency is determined by pronounced, pervasive, and persistent it turns out to be. These 3 P's correspond to the 3 D of downturn.

An expansion starts at the trough (or bottom) of a business cycle and continues until another peak, even though a recession starts at the summit and continues until the following trough.


The National Bureau of Economic Research (NBER) determines the business cycle chronology--both the beginning and end dates of recessions and expansions for the United States. Accordingly, its Business Cycle Dating Committee considers a downturn to become"a significant reduction in economic activity spread across the economy, lasting more than just a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. "3

The Dating Committee decides recession start and end dates. For instance, after the end of the 2007--09 downturns, it"appeared to make its decision until revisions from the National Income and Product Accounts [were] released on July 30 and August 27, 2010," and declared the June 2009 recession ending date on Sept. 20, 2010.4 Since the Committee's creation in 1979, the average lags from the announcement of recession start and end dates happen to be eight months for peaks and 15 weeks for troughs.5

Before the creation of this Committee, from 1949 to 1978, recession start and finish dates were determined on behalf of the NBER from Dr. Geoffrey H. Moore. He then served as the senior member of the Committee from 1979 until his departure in 2000. In 1996, Moore co-founded the Economic Cycle Research Institute (ECRI) which, based on the exact same approach used to determine the official U.S. business cycle chronology, determines business cycle chronologies for 21 additional economies, including the G7 and the BRICS.6 7 In investigations requiring international recession dates as benchmarks, the most popular process is to mention NBER dates for the U.S. and the ECRI dates for different economies.


U.S. expansions have typically lasted longer than U.S. recessions. With recessions lasting 24 weeks and expansions lasting 27 months, on average, they were equal in 1854 -- 1899. The recession duration then fell to 11 months at the post-World War II period and to 18 months in the 1900 -- 1945 interval. Meanwhile, 2009 span increased from 27 months in 1854 -- 1899, to 32 weeks in 1900 -- 1945, to 103 months at the 1982, and also to 45 weeks in 1945 -- 1982 --.

The thickness of recessions has shifted over time. They were typically very deep in the pre-World War II (WWII) period, going back to the 19th century. With cyclical volatility, the thickness of recessions diminished greatly. From the mid-1980s into the 2007's eve --09 Great Recession--the moderation was dubbed by a period --there was a reduction in cyclical volatility. Also, since about the start of the moderation that is fantastic, expansions' longevity appears to have doubled.

Business Cycle Graph.


The Varieties of Cyclical Experience

The pre-WWII experience of markets included deep recessions and recoveries. The post-WWII recoveries in the devastation wreaked by the war on many significant economies.

When fad growth is strong it's difficult for cyclical downswings to take growth below zero, into recession. For the same reason, Italy and Germany did not see their recession before the mid-1960s, and experienced two-decade expansions. In the 1950s to the 1970s, France experienced a 15-year growth, the U.K. saw a 22-year growth, and Japan enjoyed a 19-year expansion. Canada saw an expansion from the 1950s. The U.S. enjoyed its maximum growth until that time in its history, spanning nearly nine years from ancient 1961 to the end of 1969.9

Economists focused on development cycles, which consist of alternating intervals of below-trend and above-trend growth with business cycle recessions have become less frequent. But observation growth cycles necessitates a determination of this current trend, which can be problematic for real-time economic cycle calling. As a result, Geoffrey H. Moore, in the ECRI, went to a unique cyclical concept--the growth rate cycle.10

Growth rate cycles--also referred to as acceleration-deceleration cycles--are included in alternating periods of cyclical upswings and downswings in the growth rate of an economy, as measured by the growth rates of the same key coincident economic indicators used to ascertain business cycle peak and trough dates. In that way, the growth rate cycle (GRC) is the first derivative of the classical business cycle (BC). But importantly, GRC investigation doesn't want trend estimation.

Utilizing an approach analogous to that used to determine business cycle chronologies, the ECRI also determines GRC chronologies for 22 markets, such as the U.S.10 Since GRCs are predicated on the inflection points in economic cycles, they are especially helpful for investors, who are sensitive to the linkages between equity markets and financial cycles.

The researchers who initiated classical business cycle evaluation and growth cycle analysis turned to the growth rate cycle (GRC), which is comprised of alternating intervals of significant upswings and downswings in economic development, as measured by the growth rates of the same crucial coincident economic indicators used to ascertain business cycle peak and trough dates.

Stock Prices and the Business Cycle

At the post-WWII period, the largest stock price downturns usually--but not necessarily --occurred about business cycle downturns (i.e., recessions). Include the crash of 1987, which was a part of a 35 percent-plus plunge in the S&P 500 that year, its own 23 percent -and its 28 percent, and pullback in 1966 -and fall in the first half of 1962.11

However, each of those stock price declines happened during GRC downturns. Really, while stock prices generally see major downturns around business cycle recessions and upturns around business cycle recoveries, a better one-to-one relationship existed between stock price downturns and GRC downturns--and involving inventory upturns and GRC upturns--from the post-WWII period, in the decades leading up to the Great Recession.

Observing the Great Recession of 2007--09--although full inventory price downturns, featuring over-20% declines in the major averages, didn't occur until the 2020 COVID-19 pandemic--smaller 10 percent --20 percent"corrections" clustered around the four intervening GRC downturns, from May 2010 to May 2011, March 2012 to Jan. 2013, March to Aug. 2014, and April 2014 to May 2016. The plunge in the S&P 500 in 2018 also happened within the fifth GRC downturn that started in April 2017 and culminated in the 2020 downturn.12

Essentially, the possibility of recession usually, but not always, brings about a significant stock price downturn. However, much bigger smaller alterations and, on occasion downdrafts can be -- also triggered by the possibility of an economic downturn -- and especially, a GRC recession.

For investors, so it is essential to be on the economic slowdowns designated as GRC downturns, but also the lookout for not just business cycle recessions.

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