Business Cycle Peak: Definition & Overview Video

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  • 0:00 The Business Cycle
  • 0:58 The Peak
  • 3:15 Importance of Cycle & Peaks
  • 3:43 Lesson Summary
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Lesson Transcript
Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and is currently working on his PhD in Higher Education Administration.

All economies go through periods of growth and contraction called the business cycle. In this lesson, you'll learn about one phase of that cycle - the peak. After the lesson, you can test your understanding with a short quiz.

The Business Cycle

In 1946, two economists and authors - Arthur Burns and Wesley Mitchell - articulated a concept that had been present in economics for some time. While the idea that economies experienced phases of growth and contraction wasn't new - the Federal Reserve had been trying to actively manage those periods for 30 years. This was the first time it was given a name: the business cycle.

A cycle is simply a series of events that occurs in some repetitive pattern. When thinking about the business cycle, picture a series of waves. A horizontal line represents the baseline, or the water level, and as waves occur, the water level peaks higher than the baseline, and each peak has a bottom, or a trough, on each side of it. When the wave grows from the trough to the peak, it is growing, and when it falls from the peak to the trough, it is contracting. This is the pattern the business cycle follows.

The Peak

As indicated by the term peak, the top of the business cycle occurs when economic growth has reached a point where it will stabilize for a short time and then reverse direction. No economy follows a perfectly timed cycle, although the US economy typically experiences a peak-to-peak cycle every four to seven years. That, of course, is an estimate, as government intervention in the form of fiscal and monetary policy can significantly influence the length and strength of the cycle. The image below shows the GDP growth for the U.S. economy during the 20th century. As you can see, a four- to six-year cycle is normal.

US GDP 1900-2000

Because economic data, like gross domestic product (GDP), isn't reported until 3-6 months after the period being measured, it is impossible to know exactly when a peak occurred until a few months after it actually happened. That being said, there are certain economic indicators that could suggest a peak is near or has recently occurred.

When companies start reporting flat revenues - especially companies in sectors like energy, materials, and financials - it could indicate that the overall economy is slowing. Some economists and investors believe individual companies can indicate overall economic health. For example, FedEx is often looked at as an economic indicator because it is so exposed to production in a number of industries, both commercial and consumer. General Electric is another company that can provide information, since it has such a wide range of products and services.

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