The Business Cycle

Economic growth is not a steady phenomenon; rather, it tends to exhibit a pattern as follows:

1. an expansion of above-average growth
2. a peak
3. a contraction of below-average growth
4. a trough or low-point

The troughs then are followed by periods of expansion and the cycle generally repeats, though not in a regular manner. These fluctuations in economic growth are known as the business cycle and are depicted conceptually in the following diagram:

 

The Business Cycle

 

Indicators of the Business Cycle

Because the business cycle is related to aggregate economic activity, a popular indicator of the business cycle in the U.S. is the Gross Domestic Product (GDP). The financial media generally considers two consecutive quarters of negative GDP growth to indicate a recession. Used as such, the GDP is a quick and simple indicator of economic contractions.

However, the National Bureau of Economic Research (NBER) weighs GDP relatively low as a primary business cycle indicator because GDP is subject to frequent revision and it is reported only on a quarterly basis (the business cycle is tracked on a monthly basis). The NBER relies primarily on indicators such as the following:

• employment
• personal income
• industrial production

Additionally, indicators such as manufacturing and trade sales are used as measures of economic activity.

 

Notable Business Cycle Expansions and Contractions

According to the National Bureau of Economic Research, the longest U.S. economic expansion on record began in March 1991 and lasted until March 2001, a duration of 10 years.

The longest economic contraction in the NBER databse was the 65 month contraction from October 1873 until March 1879. By comparison, the contraction that began in 1929 and that initiated the Great Depression lasted 43 months from August 1929 until March 1933.

 

Business Cycle Intensity Over Time

Many economists believe that the business cycle has become less pronounced, exhibiting briefer and shallower economic contractions. While there is economic data to support a diminished business cycle, other economists argue that the data prior to 1929 was not very accurate and tended to overstate the magnitude of the economic swings.

Whether the business cycle has become less intense has practical importance because after World War II the U.S. government initiated policies with the intent to minimize the severity of economic contractions, so a decrease in the intensity of the contractions would support the arguments of those who advocate such policies. Whether the business cycle really has declined in severity is a question that remains open to debate.