- Contraction - When the economy starts slowing down.
- Trough - When the economy hits bottom, and generally stagnates at a low level.
- Expansion - When the economy starts growing again.
- Peak - When the economy is in a state of "irrational exuberance."
The National Bureau of Economic Research (NBER) analyzes economic indicators to determine the phases of the business cycle. The Business Cycle Dating Committee uses quarterly GDP growth as the primary indicator of economic activity. However, it also uses monthly figures, such as employment, real personal income, industrial production and retail sales.
The business cycle is caused by many factors, but is generally dependent on the availability of capital, which is basically influenced by interest rates. Too much capital will turn a healthy expansion into a peak, at which point greed will bid up the price of assets, often causing inflation. At this point, a stock market correction may indicate that assets are overvalued, creating fear and a contraction. The Federal Reserve tries to spur the economy into expansion during a trough, and raise rates during an expansion to avoid a peak.
A trough usually is accompanied by a recession and a bear market, while an expansion is usually signaled by a bull market.
