The business cycle is the natural fluctuation in economic growth that happens over a long period of time. All business cycles are characterized by several different stages: Expansion, Peak, Recession, Depression, Trough, Recovery.
This is the first stage. The expansion is a period when economic growth is increasing. This is the time when an increase in employment, incomes, production, and sales occurs. The economy has a steady flow in the money supply and investment is booming.
The peak is the “top” of this business cycle. This is a stage when the economy hits the top, having reached a maximum level of growth. Prices hit their highest level, and economic indicators stop growing. Many people start to restructure as the economy's growth starts to reverse.
The recession is a decline in economic growth. During a recession, unemployment increases, production slows down, sales start to decrease because of a decline in demand, and incomes become stagnant or decline.
Economic growth continues to drop while unemployment rises and production plummets. Consumers and businesses find it hard to secure credit, trade is reduced, and bankruptcies start to increase. Consumer confidence and investment levels also drop.
The trough is the “bottom” of this decline. This period is the end point of the depression, leading an economy into the next step.
Recovery is where economic growth moves away from the low point. Low prices start to increase, employment and production also start to rise, and lenders start to open up their credit coffers. This stage marks the end of one business cycle.