What Are the Characteristics of Each Stage of the Business Cycle?
Though the name implies that this phenomenon applies to a specific industry or organization, the business cycle is actually a repetition of four periods that occurs in the general economy. Each of these four periods consists of a number of traits specific to that period, though the traits of each period may help trigger the next portion of the cycle.
The expansion period, also commonly known as the growth period, occurs as the economy grows and more members of society share in prosperity. During the expansion period, an increase in consumer demand spurs employers to hire more workers as they ramp up production. The newly employed workers add to demand as they become able to buy more goods of their own, and the process continues. Signature characteristics of the expansion period also include increased business activity, higher consumer confidence and, less positively, inflation. The longest expansion period in U.S. history, according to the website Quick MBA, occurred between March 1991 and March 2001.
After a sustained expansion period, the economy tends to peak, with operations at or near capacity. In the peak period, business leaders typically see demand plateau, and hiring may level off as managers begin to meet demand with existing resources. During this period, sometimes also known as a period of prosperity, workers commonly ask for raises to absorb the effects of inflation. Even without increased business spending or the addition of new positions, these raises push the cost of goods higher, and inflation typically continues. Businesses may begin identifying efficiencies that allow them to reduce headcount to boost profits without raising prices.
After identifying efficiencies and synergies during a peak period, businesses tend to lay off workers as the economy enters a period of contraction. During this period, the economy typically sees layoffs and downsizing, and the unemployment rate may climb. The laid-off workers have less money to spend, so consumer demand falls; businesses with lower demand may attempt to maintain profits by laying off even more workers, accelerating the contraction. With fewer workers and lower demand for goods and services, businesses also tend to cut spending and put other cost-saving measures in place during this period of the business cycle. The longest economic contraction in the U.S. took place between October 1873 and March 1879, according to Quick MBA.
As layoffs and corporate downsizing plateau, the economy finds a new balance during a period of recession; some economists also call this period a trough. At the low point of the business cycle, layoffs and downsizing activities slow or end, and unemployment peaks. Very high unemployment equates to very low demand, and the overall gross domestic product, or GDP, shrinks. Business leaders tend to be less focused on efficiencies during troughs, turning their attention to developing new revenue streams. These new endeavors set the stage for the expansion cycle.