The business cycle is the fluctuations in the general level of economic activity as measured by such variables as the rate of unemployment and changes in real GDP. Periods of growth in real output and other aggregate measures of economic activity followed by periods of decline are distinguishing characteristics of business cycles. A complete business cycle is represented by A to G in the diagram below:
When most businesses are operating at capacity level and real GDP is growing rapidly, a business peak or boom is present.
Aggregate business conditions are slow, real GDP grows at a slower rate or even declines, and the unemployment rate increases. This indicates that the economy begins the contraction, or recessionary, phase of a business cycle.
The bottom of the contraction phase is referred to as the recessionary trough. When a contraction is prolonged and characterized by a sharp decline in economic activity, it is called a depression.
After the downturn reaches bottom and economic conditions begin to improve, the economy enters the expansion phase of the cycle. Here business sales rise, GDP grows rapidly, and the rate of unemployment declines.
Orders for new equipment are early signals of recovery. Since it usually takes longer to plan and complete large construction projects than for equipment orders, construction projects may be less influenced by business cycles.
The expansion eventually blossoms into another peak.