The term business cycle (or economic cycle) refers to economy-wide fluctuations in

production or economic activity over several months or years. These fluctuations occur
around a long-term growth trend, and typically involve shifts over time between periods
of relatively rapid economic growth (expansion or boom), and periods of relative
stagnation or decline (contraction orrecession).[1]

These fluctuations are often measured using the growth rate of real gross domestic
product. Despite being termed cycles, most of these fluctuations in economic activity do
not follow a mechanical or predictable periodic pattern.
Definition: A business cycle is the periods of growth and decline in an
economy. There are four stages in the business cycle:
1. Contraction - When the economy starts slowing down.
2. Trough - When the economy hits bottom, usually in arecession.
3. Expansion - When the economy starts growing again.
4. Peak - When the economy is in a state of "irrational exuberance."

5. A recession is when GDP growth slows, businesses stop

expanding, employment falls, unemployment rises, and housing
prices decline.

Definition: Irrational Exuberance was a phrase coined by Alan

Greenspan in 1996 to describe why investors would drive a stock
market bubble. In this speech to the American Enterprise Institute in
1996, the then-Chairman of the Federal Reserve was describing the
frenzy and greed that stock investors feel at the top of a bull market.
This irrational exuberance causes investors to overlook deteriorating
economic fundamentals in the pursuit of ever-higher returns.

The danger of irrational exuberance is that it doesn't last. The frenzy

of greed then turns to the panic of fear, which drives investors to sell
at any cost. This collapse in stock market prices can spread to the
entire economy.

Greenspan was talking about the proper role ofmonetary policy,

which usually doesn't concern itself with the stock market or even
real estate prices. He noted, however, that central bankers must be
concerned when they sense that irrational exuberance is driving a
boom that could lead to a bust. When the stock market affects the
economy, then central bankers must get involved.
 Greenspan's use of the phrase irrational exuberance caused stock
markets to decline the next day. That is because investors became
afraid that the powerful Federal Reserve Chairman would raise
interest rates to slow down the economy. Ever since then, the term
irrational exuberance has become a rather famous phrase used to
describe stock market booms.

• Contraction: A slowdown in the pace of economic activity

• The lower turning point of a business cycle, where a contraction turns
into an expansion
• Expansion: A speedup in the pace of economic activity
• Peak: The upper turning of a business cycle

Four Stages of Business Cycle: Stage One – Start-up/Creation

There is a lot of planning that goes into starting any business. Stage one is the
nascent phase of the business during which the business plans and strategies
are finally executed and the business organization comes into existence. This
is the stage where the business is not generating revenue but trying to
establish itself in the market and attract a stable set of investors and
customers. This is the stage where the business has to invest a lot of
resources in creating the basic infrastructure and then marketing and
advertising itself in the market. This is the phase during which innovative ideas
are encouraged, in order to establish a USP (Unique Selling Proposition) for
the company. It is a difficult task to have a smooth sailing business, without
any struggle right from the beginning since the early stage of business setup
involves higher risks. The income in the first stages is always lesser than the
investments and hence initial stage is marked by lower profit margins for the
business.

Four Stages of Business Cycle: Stage Two – Growth

Once the business passes the nascent phase, it begins to find their core
customers. Stage two or the growth phase of the business is when the
business establishes its niche in the market. This is the phase where the
business owners start to establish their brand identity and generate brand
loyalty within their customer base using sound marketing practices. Although
the focus of this stage is to maintain the core customer group and build trust
and goodwill amongst the customers. This stage is marked by a rise in
consumer demand and a consequent requirement of increased inputs in terms
of production, manufacturing, and general operations to keep up with the rising
sales and continue growth. The growth phase is thus marked by increased
sales, rise in profit margins and thus establishment of the brand name in the
 market.

Four Stages of Business Cycle: Stage Three – Maturity

Stage three is the stage where the business reaches a certain maturity level in
terms of the market. The brand identity and brand image of the business are
well established at this stage. The customer base, investors, and other
important business networks are well laid at this point. The sales are either
increasing or at least have reached a considerable regular volume and require
less resources for advertising to enhance sales, however intensive marketing
is a must to enhance the overall market position or at least establish the
current market position. This is the phase where the company would want to
branch out into other ventures and dabble with product innovation. This is the
business stage where the profit margins are fairly stable.

Four Stages of Business Cycle: Stage Four – Recession/Decline

Every business at some point of time undergoes a stage where it experiences

a decline in the sales and an overall unfavorable atmosphere in the market
termed as recession. This is nothing but a period of reduced economic activity,
which results in a sharp or considerable decline in buying, selling, production,
and even employment. The company might experience reduce in profit
margins or even loss depending on the market positions. This is the phase
where the company struggles to maintain its existence in the market and trying
its level best to equip itself for a quick recovery.

These are the four stages of business cycle experienced by every business big
or small. Sometimes the business flourishes and gains maximum profits, while
at times the business is on the verge of a complete breakdown. It is the
attitude and the positive perspective of successful businessmen that keeps
every business going through the ups and downs and yet always aiming for
the pinnacle.

BUSINESS CYCLES

A business cycle is a sequence of economic activity in a nation's economy that is typically

characterized by four phases—recession, recovery, growth, and decline—that repeat
themselves over time. Economists note, however, that complete business cycles vary in
length. The duration of business cycles can be anywhere from about two to twelve years,
with most cycles averaging about six years in length. In addition, some business analysts
have appropriated the business cycle model and terminology to study and explain
fluctuations in business inventory and other individual elements of corporate
operations. But the term "business cycle" is still primarily associated with larger
(regional, national, or industrywide) business trends.

STAGES OF A BUSINESS CYCLE

RECESSIONA recession—also sometimes referred to as a trough—is a period of

reduced economic activity in which levels of buying, selling, production, and
employment typically diminish. This is the most unwelcome stage of the business cycle
for business owners and consumers alike. A particularly severe recession is known as a
depression.

RECOVERYAlso known as an upturn, the recovery stage of the business cycle is the
point at which the economy "troughs" out and starts working its way up to better
financial footing.

GROWTHEconomic growth is in essence a period of sustained expansion. Hallmarks

of this part of the business cycle include increased consumer confidence, which
translates into higher levels of business activity. Because the economy tends to operate
at or near full capacity during periods of prosperity, growth periods are also generally
accompanied by inflationary pressures.

DECLINEAlso referred to as a contraction or downturn, a decline basically marks the

end of the period of growth in the business cycle. Declines are characterized by
decreased levels of consumer purchases (especially of durable goods) and, subsequently,
reduced production by businesses.

FACTORS THAT SHAPE BUSINESS CYCLES

For centuries, economists in both the United States and Europe regarded economic
downturns as "diseases" that had to be treated; it followed, then, that economies
characterized by growth and affluence were regarded as "healthy" economies. By the end
of the 19th century, however, many economists had begun to recognize that economies
were cyclical by their very nature, and studies increasingly turned to determining which
factors were primarily responsible for shaping the direction and disposition of national,
regional, and industry-specific economies. Today, economists, corporate executives, and
business owners cite several factors as particularly important in shaping the complexion
of business environments.

VOLATILITY OF INVESTMENT SPENDINGVariations in investment spending is

one of the important factors in business cycles. Investment spending is considered the
most volatile component of the aggregate or total demand (it varies much more from
year to year than the largest component of the aggregate demand, the consumption
spending), and empirical studies by economists have revealed that the volatility of the
investment component is an important factor in explaining business cycles in the United
States. According to these studies, increases in investment spur a subsequent increase in
aggregate demand, leading to economic expansion. Decreases in investment have the
opposite effect. Indeed, economists can point to several points in American history in
which the importance of investment spending was made quite evident. The Great
Depression, for instance, was caused by a collapse in investment spending in the
aftermath of the stock market crash of 1929. Similarly, prosperity of the late 1950s was
attributed to a capital goods boom.

There are several reasons for the volatility that can often be seen in investment
spending. One generic reason is the pace at which investment accelerates in response to
upward trends in sales. This linkage, which is called the acceleration principle by
economists, can be briefly explained as follows. Suppose a firm is operating at full
capacity. When sales of its goods increase, output will have to be increased by increasing
plant capacity through further investment. As a result, changes in sales result in
magnified percentage changes in investment expenditures. This accelerates the pace of
economic expansion, which generates greater income in the economy, leading to further
increases in sales. Thus, once the expansion starts, the pace of investment spending
accelerates. In more concrete terms, the response of the investment spending is related
to therateat which sales are increasing. In general, if an increase in sales is expanding,
investment spending rises, and if an increase in sales has peaked and is beginning to
slow, investment spending falls. Thus, the pace of investment spending is influenced by
changes in the rate of sales.

MOMENTUMMany economists cite a certain "follow-the-leader" mentality in

consumer spending. In situations where consumer confidence is high and people adopt
more free-spending habits, other customers are deemed to be more likely to increase
their spending as well. Conversely, downturns in spending tend to be imitated as well.

TECHNOLOGICAL INNOVATIONSTechnological innovations can have an acute

impact on business cycles. Indeed, technological breakthroughs in communication,
transportation, manufacturing, and other operational areas can have a ripple effect
throughout an industry or an economy. Technological innovations may relate to
production and use of a new product or production of an existing product using a new
process. The video imaging and personal computer industries, for instance, have
undergone immense technological innovations in recent years, and the latter industry in
particular has had a pronounced impact on the business operations of countless
organizations. However, technological innovations—and consequent increases in
investment—take place at irregular intervals. Fluctuating investments, due to variations
in the pace of technological innovations, lead to business fluctuations in the economy.

There are many reasons why the pace of technological innovations varies. Major
innovations do not occur every day. Nor do they take place at a constant rate. Chance
factors greatly influence the timing of major innovations, as well as the number of
innovations in a particular year. Economists consider the variations in technological
innovations as random (with no systematic pattern). Thus, irregularity in the pace of
innovations in new products or processes becomes a source of business fluctuations.

VARIATIONS IN INVENTORIESVariations in inventories—expansion and

contraction in the level of inventories of goods kept by businesses—also contribute to
business cycles. Inventories are the stocks of goods firms keep on hand to meet demand
for their products. How do variations in the level of inventories trigger changes in a
business cycle? Usually, during a business downturn, firms let their inventories decline.
As inventories dwindle, businesses ultimately find themselves short of inventories. As a
result, they start increasing inventory levels by producing output greater than sales,
leading to an economic expansion. This expansion continues as long as the rate of
increase in sales holds up and producers continue to increase inventories at the
preceding rate. However, as the rate of increase in sales slows, firms begin to cut back
on their inventory accumulation. The subsequent reduction in inventory investment
dampens the economic expansion, and eventually causes an economic downturn. The
process then repeats itself all over again. It should be noted that while variations in
inventory levels impact overall rates of economic growth, the resulting business cycles
are not really long. The business cycles generated by fluctuations in inventories are
calledminororshortbusiness cycles. These periods, which usually last about two to four
years, are sometimes also called inventory cycles.

FLUCTUATIONS IN GOVERNMENT SPENDING

Variations in government spending are yet another source of business fluctuations. This
may appear to be an unlikely source, as the government is widely considered to be a
stabilizing force in the economy rather than a source of economic fluctuations or
instability. Nevertheless, government spending has been a major destabilizing force on
several occasions, especially during and after wars. Government spending increased by
an enormous amount during World War II, leading to an economic expansion that
continued for several years after the war. Government spending also increased, though
to a smaller extent compared to World War II, during the Korean and Vietnam wars.
These also led to economic expansions. However, government spending not only
contributes to economic expansions, but economic contractions as well. In fact, the
recession of 1953-54 was caused by the reduction in government spending after the
Korean War ended. More recently, the end of the Cold War resulted in a reduction in
defense spending by the United States that had a pronounced impact on certain
defense-dependent industries and geographic regions.

POLITICALLY GENERATED BUSINESS CYCLES

Many economists have hypothesized that business cycles are the result of the politically
motivated use of macroeconomic policies (monetary and fiscal policies) that are
designed to serve the interest of politicians running for re-election. The theory of
political business cycles is predicated on the belief that elected officials (the president,
members of congress, governors, etc.) have a tendency to engineer expansionary
macroeconomic policies in order to aid their re-election efforts.

MONETARY POLICIESVariations in the nation's monetary policies, independent of

changes induced by political pressures, are an important influence in business cycles as
well. Use of fiscal policy—increased government spending and/or tax cuts—is the most
common way of boosting aggregate demand, causing an economic expansion. Moreover,
the decisions of the Federal Reserve, which controls interest rates, can have a dramatic
impact on consumer and investor confidence as well.

FLUCTUATIONS IN EXPORTS AND IMPORTSThe difference between exports

and imports is the net foreign demand for goods and services, also called net exports.
Because net exports are a component of the aggregate demand in the economy,
variations in exports and imports can lead to business fluctuations as well. There are
many reasons for variations in exports and imports over time. Growth in the gross
domestic product of an economy is the most important determinant of its demand for
imported goods—as people's incomes grow, their appetite for additional goods and
services, including goods produced abroad, increases. The opposite holds when foreign
economies are growing—growth in incomes in foreign countries also leads to an
increased demand for imported goods by the residents of these countries. This, in turn,
causes U.S. exports to grow. Currency exchange rates can also have a dramatic impact
on international trade—and hence, domestic business cycles—as well.

KEYS TO SUCCESSFUL BUSINESS CYCLE MANAGEMENT

Small business owners can take several steps to help ensure that their establishments
weather business cycles with a minimum of uncertainty and damage. "The concept of
cycle management may be relatively new," wrote Matthew Gallagher inChemical
Marketing Reporter,"but it already has many adherents who agree that strategies that
work at the bottom of a cycle need to be adopted as much as ones that work at the top of
a cycle. While there will be no definitive formula for every company, the approaches
generally stress a long-term view which focuses on a firm's key strengths and
encourages it to plan with greater discretion at all times. Essentially, businesses are
operating toward operating on a more even keel."

Specific tips for managing business cycle downturns include the following:

• Flexibility—According to Gallagher, "part of growth management is a flexible

business plan that allows for development times that span the entire cycle and
includes alternative recession-resistant funding structures."
• Long-Term Planning—Consultants encourage small businesses to adopt a
moderate stance in their long-range forecasting.
• Attention to Customers—This can be an especially important factor for
businesses seeking to emerge from an economic downturn. "Staying close to the
customers is a tough discipline to maintain in good times, but it is especially
 crucial coming out of bad times," stated Arthur Daltas inIndustry Week."Your
customer is the best test of when your own upturn will arrive. Customers,
especially industrial and commercial ones, can give you early indications of their
interest in placing large orders in coming months."
• Objectivity—Small business owners need to maintain a high level of objectivity
when riding business cycles. Operational decisions based on hopes and desires
rather than a sober examination of the facts can devastate a business, especially
in economic down periods.
• Study—"Timing any action for an upturn is tricky, and the consequences of being
early or late are serious," said Daltas. "For example, expanding a sales force when
the markets don't materialize not only places big demands on working capital,
but also makes it hard to sustain the motivation of the sales-people. If the force is
improved too late, the cost is decreased market share or decreased quality of the
customer base. How does the company strike the right balance between being
early or late? Listening to economists, politicians, and media to get a sense of
what is happening is useful, but it is unwise to rely solely on their sources. The
best route is to avoid trying to predict the upturn. Instead, listen to your
customers and know your own response-time requirements."

Read more:Business Cycles - percentage, benefits, cost, Stages of a business cycle,

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