Business cycles can be described as periods of boom, contraction, recession and expansion.

Boom. At the peak of the business cycle the economy is booming. Business is producing at or near capacity, and those looking for work can generally find jobs. During peak times, business investment and consumer spending are at very high levels. But because the economy is at or near full employment and the demand for goods and services is increasing, prices are also increasing. This sets the stage for the next phase of the business cycle.

Contraction. For any number of reasons, consumers and businesses begin to reduce their spending levels. Businesses may lay off workers, reduce their purchases of raw materials and reduce production because they have built up excess inventories. Some businesses may decide to continue to use old factories and equipment rather than investing in new machines and buildings. Whatever the reason, reductions in business and consumer spending mark the beginning of a contraction in the business cycle. With the reduction in spending, other business firms begin to cut back their activities. Their production is reduced and more workers are laid off. Because of the layoffs, workers, who are also consumers, spend less. This leads to still more reductions in production and additional worker layoffs.

Recession. With factories operating at less than capacity and unemployment at very high levels, total output of goods and services enters a long-term decline. This is the bottom phase of the business cycle, the period of recession. Times are hard during recessions. Unemployment is very high, jobs are difficult to find and many businesses fail. A very severe and long-lasting recession is called a «depression».

Expansion. After a period of recession the economy eventually begins to recover, entering the expansion phase of the business cycle. During a period of expansion, business and consumer spending begins to increase. Sensing that conditions are about to improve, business begins to expand its activities. Unemployment declines as additional workers are hired. This, in turn, leads to higher levels of consumer spending and still further expansion of employment, output and consumption.