The business cycle describes the recurring pattern of expansion and slowdown in economic activity.
Main phases:
- Expansion: output, employment, and spending rise.
- Peak: growth reaches a high point.
- Contraction / recession: output and spending weaken.
- Trough: the economy bottoms out before recovering.
Common indicators used to track the cycle:
- GDP for overall output
- Unemployment for labor market weakness
- Inflation Index for price pressure
In practice, finance cares about the cycle because profits, default risk, interest rates, and asset prices often move with it.