The business cycle is the repeating but irregular pattern of expansions and contractions in real GDP and other measures of economic activity. An expansion runs from a trough up to a peak. A contraction, which economists call a recession when it is significant and widespread, runs from a peak down to a trough. Over long periods the economy usually grows, so the cycle is best pictured as swings around a rising trend line rather than a wave around a flat one.

This page is for AP Macroeconomics and intro economics study. It is educational only and is not investment, financial, tax, or legal advice. It makes no forecast about the current economy.

The four phases in one picture

Most textbooks name four points or phases. The diagram below is a teaching sketch, not real data.

Business cycle teaching diagram Real GDP swings above and below a rising trend line, with a peak, a contraction, a trough, and an expansion marked. Time runs along the horizontal axis. Time Real GDP Long run trend Peak Trough Contraction Expansion Expansion
Teaching sketch: real GDP (solid line) moving around its long run trend (dashed line). Not drawn to scale.
  • Expansion. Real output, income, and employment rise. Firms hire and unemployment tends to fall.
  • Peak. The high point of activity before a decline begins. In the National Bureau of Economic Research (NBER) convention, the peak month is the last month of the expansion.
  • Contraction. Activity falls. When the fall is significant, spread across the economy, and lasts more than a few months, the NBER calls it a recession.
  • Trough. The low point before activity starts rising again. The NBER treats the trough month as the last month of the recession.

OpenStax, in its free Principles of Macroeconomics textbook, describes the movement from peak to trough and from trough to peak as the business cycle, and calls an especially lengthy and deep recession a depression.

Why it is called a cycle even though it is not regular

The word cycle can mislead. The phases repeat, but their length and depth do not. The NBER table of US business cycle expansions and contractions shows contractions as short as 2 months (February to April 2020) and as long as 65 months (October 1873 to March 1879). For the period 1945 to 2020, the same table gives an average contraction of 10.3 months and an average expansion of 64.2 months. The longest expansion on the list ran 128 months, from the June 2009 trough to the February 2020 peak.

The NBER business cycle dating page puts it simply: expansion is the normal state of the economy, and most recessions are brief. It also notes that getting back to the previous peak level of activity can take much longer than the recession itself. Those are descriptions of past dates, not predictions.

Who decides where the turning points are

In the United States, the NBER Business Cycle Dating Committee keeps the official chronology of peak and trough months. It looks at monthly measures such as real personal income less transfers and nonfarm payroll employment, and it decides the quarter of each turning point using real GDP and real gross domestic income. Its approach is retrospective, so it names a peak or trough only months after it happened.

The United Kingdom has no equivalent committee. The Office for National Statistics (ONS) says it acknowledges the widely held convention that a technical recession is two or more consecutive quarters of contracting output, while warning that this rule ignores the size of the fall and that early GDP estimates are revised. The full comparison of the two approaches, with recent US dates and announcement lags, is on the what is a recession page.

How the cycle connects to the rest of the course

The output gap is the business cycle measured against potential output. Late in a strong expansion, actual output can run above potential, which is a positive gap. In and after a recession, output usually sits below potential, which is a negative gap. In the aggregate demand and aggregate supply model, a positive gap goes with upward pressure on the price level and a negative gap goes with unemployment above its natural rate. See the AD AS model, the natural rate of unemployment, and Okun's law, which links swings in output to swings in unemployment.

Policy responds to the cycle too. Automatic stabilizers such as unemployment benefits and income tax receipts move against the cycle without new laws. Stagflation is the awkward case where output weakens while inflation stays high. For the flows behind GDP itself, start with the circular flow model and the GDP topic hub.

The College Board lists Unit 2 of AP Macroeconomics as Economic Indicators and the Business Cycle, with an exam weighting of 12 to 17 percent of the multiple choice section on its AP Central course page (retrieved 7 Nov 2026). The AP Macroeconomics study hub on this site maps each unit to explainers.

Worked example (hypothetical numbers)

The figures below are invented for practice. They are not real data for any country.

QuarterReal GDP indexChange on previous quarter
Q1100.0
Q2101.0up 1.0
Q3102.0up 1.0
Q4101.5down 0.5
Q5100.8down 0.7
Q6101.2up 0.4
Q7102.5up 1.3
  1. Peak: Q3, the highest point before output falls.
  2. Trough: Q5, the lowest point before output rises again.
  3. Contraction: Q4 and Q5. Output fell in two consecutive quarters, so the UK technical recession convention would be met. A US recession call would still depend on the NBER committee weighing depth, breadth, and duration across many indicators.
  4. Depth: from 102.0 to 100.8 is a fall of 1.2 points, or about 1.2 percent of the peak level (1.2 divided by 102.0 is roughly 0.0118).
  5. Recovery to the old peak: Q7, when the index passes 102.0. The expansion began after the Q5 trough, but the economy did not regain its earlier peak until two quarters later.

Common exam mistakes

  • Drawing the cycle around a flat line. Real GDP tends to grow over time, so draw the swings around an upward sloping trend.
  • Saying a recession means output is negative. It means output is falling from a peak, not that GDP is below zero.
  • Treating two negative quarters as the official US definition. That is a rule of thumb; the NBER uses a broader judgement.
  • Mixing up the trough and the end of the downturn in levels. Output starts rising after the trough, but it can stay below the previous peak for some time.
  • Assuming the cycle has a fixed length. Past expansions and contractions vary widely, so never predict a turning point from the calendar.

Related reading

Sources

Frequently asked questions

What are the four phases of the business cycle?

Expansion, peak, contraction, and trough. An expansion runs from a trough to a peak, and a contraction runs from a peak to a trough. A significant, widespread contraction lasting more than a few months is called a recession.

How long does a business cycle last?

There is no fixed length. In the NBER table for 1945 to 2020, US contractions averaged 10.3 months and expansions averaged 64.2 months, but individual episodes ranged from a 2 month recession in 2020 to a 128 month expansion from 2009 to 2020.

Is a recession the same as two quarters of falling GDP?

Not in the United States. Two consecutive quarters of falling real GDP is a rule of thumb that the UK Office for National Statistics acknowledges as a technical recession. In the US, the NBER dating committee judges depth, breadth, and duration across many indicators.

How does the business cycle relate to the output gap?

The output gap compares actual GDP with potential output. Late in strong expansions the gap can turn positive, and in recessions it usually turns negative, so the gap is one way to measure where the economy sits in the cycle.