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.

The business cycle is also sometimes referred to as the economic cycle. It is concerned with
the fluctuations that occur in an economy over a period of time. The economic cycle typically
occurs over a few years and will involve a period of rapid economic growth after which things
slow down and then growth declines. The term ‘business cycle’ would seem to suggest that
this process is predictable and constant but this is not the case; in fact these business cycles
can be very unpredictable. One of the main ways that a country’s business cycle is tracked is
through observing changes in GDP.
The business cycle is often said to go through four stages; expansion, peak, contraction, and
trough. During expansion there is an increase in the amount of economic activity occurring in
a country and this continues until the peak of activity is reached. After the peak the economy
begins to go through a period of contraction and economic activity begins to slow down; this
continues until the trough where the bottom of the cycle is reached and economic activity
once again begins to expand. This business cycle is a fair representation of what occurs in
economies but it is important to keep in mind that the real world is a lot more complicated and
these cycles can really be unpredictable