The economic environment is dynamic and ever-changing. Consistent periods of growth or decline are predictable but turning points are difficult to determine with a high degree of accuracy. Economists refer to these significant changes in the economic environment as the business cycle. Economic activity can be measured in terms of a number of variables, including turnover, employment, profits or losses. In terms of the construction industry, the variables used to measure business cycles are generally construction output (see Chapter 2), new orders and employment. The basic business cycle measures variation in activity from quarter to quarter or year to year. A number of business cycles have been identified according to the number of years separating the years of peak activity in the industry, which contrast sharply with construction industry recessions. Recessions in the UK are defined as two or more consecutive quarters of decline in construction activity, utilizing construction output as the measure.

Often business cycles are seen in terms of booms and slumps. However, these booms and slumps are difficult to determine while they are occurring. Economists are always on the lookout for forward-looking indicators to identify turning points. But, in general, the length and breadth of booms, and particularly slumps, are finally determined in hindsight, when analysing the historical data. What we are able to say for certain at any one point in time is that the construction industry, or wider economy, is growing or declining. Output is rarely stable even in the short term, often displaying an upward or downward trend. The key problem for economic forecasters is determining the rate of growth or decline and these turning points. Periods of growth may turn into periods of decline for a variety of reasons: lack of demand arising from market saturation or changes in government policies; oversupply because of investment overestimating future demand or inventory management; and changes in consumption and savings.

A key reason for understanding business cycle fluctuations is to help in mitigating their effects on the firms, the industry and wider economy by anticipating future demand, and supply in particular.