Business cycle defined

The business cycle refers to the recurring and fluctuating levels of activity that an economy goes through such as expansion, peak, contraction, trough, and recovery. These levels are measured by changes in gross domestic product (GDP), trade activity, and other factors.

Business cycles were once considered quite regular, with predictable duration. But today their frequency, magnitude, and duration vary considerably.

Industries also have business cycles. Different industries respond differently to the macroeconomic forces, so the duration and magnitude of the phases vary.

Investors acknowledge these differences with the terms “cyclical” and “non-cyclical”:

  • Non-cyclical companies enjoy profits regardless of economic fluctuations because they produce or distribute goods and services that are always needed, such as food and power.
  • Cyclical companies’ stock performance depends on a strong economy. Sales are healthy when people have the extra income to spend on these items, but sales decline when the economy declines.

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Categories: Personal Finance

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