During which phase of the business cycle does unemployment begin to rise and fewer new businesses start?

In the context of the business cycle, the phase where unemployment begins to rise and fewer new businesses start is known as contraction. This phase follows a peak, which is when the economy is performing at its best, and marks a downturn in economic activity.

During contraction, consumer demand typically decreases, leading businesses to scale back production and cut back on hiring. Fewer new startups emerge because the economic environment becomes less favorable—access to capital may tighten, and consumers are less willing to spend. As a result, existing businesses may also lay off workers or deactivate certain operations, increasing the unemployment rate. This simultaneous drop in employment and business formation characterizes the contraction phase, illustrating the challenges faced in the economy when growth is stunted.