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What Is a Business Cycle Recession?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 18 July 2014
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    Conjecture Corporation
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A business cycle recession is a common element found in any business cycle. Essentially, this portion of the cycle describes a period in which the demand for the goods and services of the company decreases, a situation that typically means a decrease in sales revenue. The severity of the recession will vary, with some businesses experiencing mild downturns due to seasonality, while other companies experience a continuous cycle of extremes in both recession and expansion. Typically, the recession is followed by a short period known as a trough before demand increases once more and the company enters into a phase of expansion.

There are several reasons why a business cycle recession may take place. Shifts in the economy are one of the prime reasons why a company may see its sales revenue go back to a lower level known in former years. When consumer income is adversely affected by the economy, this means those consumers will begin to change their purchasing habits. Therefore, companies producing goods and services considered to be non-essential by those cash-strapped consumers are likely to experience a decrease in demand, which in turn causes profits to move downward into a recession.

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Another reason for business cycle recession changes in consumer tastes. This can occur when new products are offered in the marketplace that effectively render older products obsolete in the minds of consumers. When this happens, companies producing those older products will see sales decline and cash flow reduced. Depending on the nature of the products, aggressive advertising to new markets or possibly enhancing the products so they are more competitive may slow the downturn, allow the sales to level off into a trough situation, and then slowly begin to enter a recovery period in terms of sale revenue that eventually leads the way to a period of expansion.

The concept of a business cycle recession can be applied to an individual company, an industry, or even the business community within a given country. In each scenario, assessing the reasons for the downturn and projecting how long that situation will persist will often provide valuable ideas on how to deal with the situation. For this reason, many corporations look closely at the movement of the business cycle as it relates to the industry in order to anticipate events that could cause a downturn in revenue. At the same time, keeping in touch with the development and pending release of new technology that could have an adverse effect on the profitability of the product line, and creating strategies to counteract that effect, could help to minimize business cycle recession and allow the company to move through the phase and on to recovering and enjoying increased sales once more.

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