Business Cycles in the United States

11 Key excerpts on "Business Cycles in the United States"

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  Economics for Investment Decision Makers

  Micro, Macro, and International Economics

  • Christopher D. Piros, Jerald E. Pinto(Authors)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  This long definition is rich with important insights. First, business cycles are typical of economies that rely mainly on business enterprises—therefore, not agrarian societies or cen- trally planned economies. Second, a cycle has an expected sequence of phases representing alternation between expansion and contraction. Third, such phases occur at about the same time throughout the economy—that is, not just in agriculture or not just in tourism but in almost all sectors. Fourth, cycles are recurrent (i.e., they happen again and again over time) but not periodic (i.e., they do not all have the exact same intensity and duration). Finally, cycles typically last between one and 12 years. Although Burns and Mitchell’s definition may appear obvious in part, it indeed remains helpful even more than 60 years after it was written. Many investors like to think that there are simple regularities that occur at exactly the same time, every year or cycle: for example, shares always rally in January and big crashes occur in October. Of course, things are much more complex. The truth, as Burns and Mitchell remind us, is that history never repeats itself exactly, but it certainly has similarities that can be taken into account when analyzing the present and forecasting the future. 2.1. Phases of the Business Cycle A business cycle consists of four phases: trough, expansion, peak, contraction. The period of expansion occurs after the trough (lowest point) of a business cycle and before its peak 280 Economics for Investment Decision Makers (highest point), and contraction is the period after the peak and before the trough. 1 During the expansion phase, aggregate economic activity is increasing (aggregate is used because some individual economic sectors may not be growing). The contraction—often called a recession, but may be called a depression when exceptionally severe—is a period in which aggregate economic activity is declining (although some individual sectors may be growing).

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  Economics for Investment Decision Makers

  Micro, Macro, and International Economics

  • Christopher D. Piros, Jerald E. Pinto(Authors)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  Whereas the chapter on national income accounting and growth focused on long-term economic growth and the factors that help foster it, this chapter addresses short-term movements in economic activity. Some of the factors causing such short-term movements are the same as those causing economic growth, such as changes in population, technology, and capital. However, other factors, such as money and inflation, are more specific to short-term fluctuations.

  This chapter is organized as follows. Section 2 describes the business cycle and its phases, explaining the behaviors of businesses and households that typically characterize phases and transitions between phases. Section 3 provides an introduction to business cycle theory, in particular how different economic schools of thought interpret the business cycle and their recommendations with respect to it. Section 4 introduces basic concepts concerning unemployment and inflation, two important economic policy concerns that are sensitive to the business cycle. Section 5 discusses variables that fluctuate in predictable time relationships with the economy, focusing on variables whose movements have value in predicting the future course of the economy. A summary and practice problems conclude the chapter.

  2. OVERVIEW OF THE BUSINESS CYCLE

  Burns and Mitchell (1946) define the business cycle as follows:

  Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; this sequence of events is recurrent but not periodic; in duration, business cycles vary from more than one year to 10 or 12 years.

  This long definition is rich with important insights. First, business cycles are typical of economies that rely mainly on business enterprises—therefore, not agrarian societies or centrally planned economies. Second, a cycle has an expected sequence of phases representing alternation between expansion and contraction. Third, such phases occur at about the same time throughout the economy—that is, not just in agriculture or not just in tourism but in almost all sectors. Fourth, cycles are recurrent (i.e., they happen again and again over time) but not periodic (i.e., they do not all have the exact same intensity and duration). Finally, cycles typically last between one and 12 years.

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  Business Cycles: Fact, Fallacy And Fantasy

  Fact, Fallacy and Fantasy

  • Sumru G Altug(Author)
  • 2009(Publication Date)
  • World Scientific

    (Publisher)

  8 Business Cycles: Fact, Fallacy and Fantasy economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; this sequence of changes is recurrent but not periodic; in duration business cycles vary from one year to ten or twelve years; they are not divisible into shorter cycles of similar cycles with amplitudes approximating their own. This definition has formed the basis of modern thinking about business cycles, whether it pertains to the measurement of business cycles or the construction of models of cyclical fluctuations. Burns and Mitchell [50] themselves noted that this definition raised as many questions as it sought to answer. Some of these questions are precisely the ones that we seek to answer in this book. If one talks about “fluctuations in the aggregate economic activity of nations”, then should one worry about differences in business cycle activity across regions? Should business cycles be considered in an international context? How about the historical nature of business cycles? Have business cycles moderated over time? Likewise, when one considers the statement regarding expansions occurring in “many economic activities”, how broadly should the aggregates that are being considered be defined? The notion that changes in economic activity occur “at about the same time” admit the possibility of economic variables that lead or lag the cycle. In seeking to identify “recurrent changes”, how should we deal with seasonal changes, random fluctuations, or secular trends? Finally, the comments regarding the duration and amplitude of business cycles are based on actual observations of cyclical phenomena, and also lay down rules for excluding irregular movements and other similar changes.

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  Classification and Clustering in Business Cycle Analysis.

  • Claus Weihs, Ullrich Heilemann, Ullrich Heilemann, Claus Weihs(Authors)
  • 2010(Publication Date)
  • Duncker & Humblot

    (Publisher)

  Victor Zarnowitz Phases and Stages of Recent U.S. Business Cycles 1. Introduction Business cycles are sequential developments with many diverse features but one common characteristic: they consist of recurrent expansions and contractions in the level of total economic activity. The latter concept is not one-dimensional but embraces many interrelated economic variables. It is best thought of as co-movement: tendency to grow and fluctuate together of production, employment, real income, sales, prices, monetary aggregates etc. in many sectors and regions of the economy (e.g. Zarnowitz 1985). These movements are imperfectly correlated as the variables differ in cyclical sensitivity and timing, in part systematically, but they affect the economy as a whole in most of its aspects. At least after the fact, with most of the important comprehensive data in, there is usually a prevailing agreement that a boom or a recession had indeed occurred. Yet there is little that is clearly repetitive, periodic, and predictable about business cycles, and they are indeed poorly predicted. The reason is that the economy’s structure and dynamics change and interact, and that outside events and policies affect the outcomes. Some of the change is gradual, some is fast. There are policy reactions as well as initiatives; both have various constraints – economic, financial, and political – but both can benefit from learning. So can private decision-making. Economic and other variables undergo shifts due to unexpected shocks, which influence business cycles in ways that are elusive. Still, important self-sustaining or endogenous elements undeniably exist in business cycles and it is mainly their study that promises progress in analysis and forecasting. Some prominent economists have worked in this difficult area with impressive results. They succeeded in describing what happens during expansions and contractions, and how one phase gives way to the other. These advances led to

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  Demystifying Global Macroeconomics

  • John E. Marthinsen(Author)
  • 2020(Publication Date)
  • De Gruyter

    (Publisher)

  Chapter 14 Business Cycles What are business cycles, and why are they important to business managers? What causes them, and who determines when recessions or expansions start and end? After centuries of fluctuating economic activity, have nations gotten better at controlling or predicting business cycles, or are they as frequent, extreme, and fickle as ever? The Basics What Are Business Cycles? Business cycles are recurring , irregular , and unsystematic movements in real economic activity around a long-term trend. They are recurring because down-turns and upturns in real economic activity have occurred for as far back as his-tory is written, and these cycles will surely continue in the future. Unlike the smooth and symmetric patterns of sound or light waves, business cycles are ir-regular and appear as jagged, uneven movements around a long-term trend. Business cycles are also unsystematic, which means they are random and diffi-cult (some believe impossible) to predict. A considerable amount of time and effort has been devoted to predicting business cycles. Unfortunately, most of these predictions have been highly inaccurate. How Are Business Cycles Measured? Figure 14.1 shows a hypothetical business cycle. A recession occurs when there is a significant contraction in economic activity, which is spread broadly across the economy and lasts for more than a few months. The duration of a recession is from the peak of the business cycle to the trough (i.e., low point). An expansion is precisely the opposite. It occurs when broad-based eco-nomic activity improves significantly and is sustained for more than a few months. The duration of an expansion is from the cycle ’ s trough to its peak. The entire business cycle can be measured from one peak to the next peak, or it can be measured from one trough to the next. In Figure 14.1, the business cycle is measured from peak to peak. https://doi.org/10.1515/9781547401437-014

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  Macroeconomics for MBAs and Masters of Finance

  • Morris A. Davis(Author)
  • 2009(Publication Date)
  • Cambridge University Press

    (Publisher)

  Since the level of technology is, on average, increasing over time, the modern theory of business cycles is fundamentally linked to the theory of growth. Specifically, business cycles arise because the level of technology does not increase at exactly the same rate in each period, but rather displays cyclical patterns around a relatively fixed rate of growth. Business Cycles 169 5.1 Business Cycle Dates A group of economists at the NBER label the periods when the econ-omy is in “recession” and when the economy is in “expansion.” Basi-cally, and this is not quite a rule, the NBER economists label the economy as being in a recession when the growth rate of real GDP is negative for two consecutive quarters. In other words, a recession is associated with a decrease in the level of real output. The economy is expanding otherwise. On the NBER’s main business cycle page, www.nber.org/cycles/ cyclesmain.html, a list of contraction and expansion dates for the US economy is presented. The quarterly reference dates starting in 1945, along with duration data (in months) are listed in Table 5.1 . Figure 5.1 graphs the quarterly change in the natural log of real GDP over the 1949:1–2007:4 period. The shaded gray areas in this graph indicate the NBER recession dates that are listed in Table 5.1 . Note that the change in the natural log of real GDP is approximately equal to the growth rate of real GDP: Defining y t as real GDP in period t , 1 then ln ( y t ) − ln ( y t − 1 ) = ln y t y t − 1 = ln 1 + y t − y t − 1 y t − 1 ≈ y t − y t − 1 y t − 1 . 5.2 Trends and Cycles Although the NBER labels are helpful, macroeconomists have also developed formal procedures for defining business cycles and study-ing the cyclical properties of major macroeconomic variables. 1 See the appendix for a review.

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  Analyzing Modern Business Cycles

  Essays Honoring

  • Philip Klein(Author)
  • 2017(Publication Date)
  • Taylor & Francis

    (Publisher)

  Classical cycles historically have been the main concern of business cycle studies at the National Bureau of Economic Research (NBER) in New York. The NBER studies began with the work of Mitchell (1927; see Moore and Zarnowitz 1986). The classical cycle fits the business cycle theories of Kalecki (1939) and Schumpeter (1939). It also fits the hints Keynes (1936) offered about the nature of business cycles; and it is the cycle that is clearly at the heart of the post-Keynesian models of, for instance, Kaldor (1940) and Hicks (1950). Table 3.1 shows that there was no classical contraction in the United States between February 1961 and December 1969, a period of 106 months; Table 3.2 shows a classical upswing continuing in Australia from September 1961 to July 1974, a period of 154 months. The experience of the 1960s, especially in the United States with no classical downturn between 1961 to 1969, contributed to a revival of interest in growth cycles. 4 Growth cycles are defined as fluctuations in the rate of growth of aggregate economic activity, with periods when the growth rate is above the long Table 3.1 Phases of Business Cycles, U.S., 1948-87 Table 3.2 Phases of Business Cycles, Australia, 1950-87 term trend rate alternating with periods when it is below this long-term value, but not necessarily negative. This enables account to be taken of the important fact that a slowdown may occur when the growth rate, though continuing positive, is slower than the long-term trend rate of growth. Hence excess capacity, notably unemployment, rises

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  Macroeconomics for Managers

  • Michael K. Evans(Author)
  • 2008(Publication Date)
  • Wiley-Blackwell

    (Publisher)

  part V Cyclical fluctuations Because the US economy was subjected to only one minor recession from 1983 to 2000, the recent tendency in macroeconomics has been to ignore short-term fluctuations and concentrate, sometimes exclusively, on the factors determining long-term growth. This approach is not followed here for several reasons. 1. Business cycles not only continue to occur in the US, but in virtually every major country in the world. Real GDP declined in the UK in 1991 and 1992, and in France, Germany, and Italy in 1993. Japan has been in an extended period of stagnation since 1992, and real GDP declined in 1998 and again in 2001. Most east Asian countries plunged into a serious recession in 1998. Mexico, Brazil, and Argentina all suffered recessions during the late 1990s, with another recession in Argentina in 2002. In order to understand how the international as well as domestic economy really works, it is useful to study these cyclical fluctuations. The general shape of the business cycle, and the reasons why it occurs, are covered in chapter 15. 2. Even if the US economy does manage to avoid serious recessions in the future, explaining the cyclical swings in purchases of consumer durables, capital spending, housing, and inventory investment will enhance the overall understanding of how the macroeconomy works. In the future, it is quite possible that the manufacturing sector will exhibit all the signs of recession, but the overall economy will not actually decline. Before 9/11, it appeared that might very well be the case for the US economy in 2001. Factors leading to cyclical fluctuations in these components of aggregate demand are covered in chapter 16. 3. Financial cycle business sectors continue to be frequent even though real sector cycles are not – and can still lead to business cycles. If fluctuations in interest rates and stock prices are large enough, they may cause a recession even if no other cyclical factors are present.

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  Analysing Modern Business Cycles

  Essays Honoring Geoffrey H.Moore

  • Philip A. Klein(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  Classical cycles historically have been the main concern of business cycle studies at the National Bureau of Economic Research (NBER) in New York. The NBER studies began with the work of Mitchell (1927; see Moore and Zarnowitz 1986). The classical cycle fits the business cycle theories of Kalecki (1939) and Schumpeter (1939). It also fits the hints Keynes (1936) offered about the nature of business cycles; and it is the cycle that is clearly at the heart of the post-Keynesian models of, for instance, Kaldor (1940) and Hicks (1950). Table 3.1 shows that there was no classical contraction in the United States between February 1961 and December 1969, a period of 106 months; Table 3.2 shows a classical upswing continuing in Australia from September 1961 to July 1974, a period of 154 months. The experience of the 1960s, especially in the United States with no classical downturn between 1961 to 1969, contributed to a revival of interest in growth cycles. 4 Growth cycles are defined as fluctuations in the rate of growth of aggregate economic activity, with periods when the growth rate is above the long-term trend rate alternating with periods when it is below this long-term value, but not necessarily negative. This enables account to be taken of the important fact that a slowdown may occur when the growth rate, though continuing positive, is slower than the long-term trend rate of growth. Hence excess capacity, notably unemployment, rises. On the other hand, during the expansion phase of the growth cycle, when excess capacity is being absorbed, the actual rate of growth is above the long-term trend rate of growth. Table 3.1 Phases of Business Cycles, U.S., 1948–87 Sources: a CIBCR 1988a. b U.S. Department of Commerce 1988, p

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  The New Regional Economies

  The US Common Market and the Global Economy

  • William R. Barnes, Larry C. Ledebur(Authors)
  • 1997(Publication Date)
  • SAGE Publications, Inc

    (Publisher)

  C H A P T E R BUSINESS CYCLES AND LOCAL ECONOMIES Economic theory and federal policy appear to assume (a) that there is a single national economy, (b) that there are uniform regional responses to federal macroeconomic policies, and (c) that variations in regional business cycles and their responses to national policies are not the concern of national policy and can safely be ignored. Policies targeted to regions or industries are dismissed as structural and considered by mainstream economists not to be an appropriate means of promoting cyclical stabilization. If there is a single national economy, however, and if regions respond uniformly to federal macroeconomic policies, then the business cycles experienced by regions should conform to the pattern of the national business cycle and, hence, to one another. The national business cycle and regional fluctuations, measured by rates of change in cyclical indi-cators, should be one and the same or similar enough that they would not matter. 49 50 THE NEW REGIONAL ECONOMIES Business cycles have been the nemesis of industrial economies. Karl Marx predicted the ultimate collapse of capitalism through successive and increasingly severe cycles of boom and bust. The promise of Keynesian economics was its potential to moderate these recurrent cycles of depression and expansion. Mainstream economics since the 1930s and federal economic policy since the 1960s have focused on means to control cyclical instability and promote stable, long-term national economic growth. The youthful art of macroeconomics tends not to deal with differ-ences in the timing and severity of business cycles across regions or with differences in the responsiveness of regional cycles to federal fiscal and monetary policies. The only interest in regional differences has focused on the possibility of using regions that tend to lead the national cycle as a means of forecasting national trends.

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  Macroeconomic Theory and the Eurozone Crisis

  • Alain Alcouffe, Maurice Baslé, Monika Poettinger, Alain Alcouffe, Maurice Baslé, Monika Poettinger(Authors)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  He assumed the existence of long waves of an average length of about 50 years in the capitalist economy. In 1937, Kal-ecki proposed a theory of the business cycle focused on investment processes (closely allied to the Keynesian theory). His analysis was divided in two parts: the determination of short-period equilibrium with a given amount of capital equipment and with a given rate of investment; and the determination of the rate of investment. The answer to the question “what causes the periodical cri-sis?” seems obvious – investment considered as capitalists’ spending is the source of prosperity. But at the same time, investment drives the capitalist economy to crisis. In 1946, Burns and Mitchell presented a detailed, technical analysis of a method for studying the cyclical behavior of 1,277 individual series (covering production, transportation, employment, prices, inventories, sales and mon-etary circulation) in the United States, Great Britain, Germany and France. They arrived at the definition that a business cycle: consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and reviv-als which merge into the expansion phase of the next cycle, this sequence of changes is recurrent but not periodic; in duration business cycles vary from more than one year to ten or twelve years; they are not divisible into shorter cycles of similar character with amplitudes approximating their own. (1946, p. 3) 20 Arnaud Diemer More recently, Kydland and Prescott (1982) developed a competitive equilib-rium model to explain autocovariances of real output and the covariances of cyclical output with other aggregate economic time series for the post-war US economy.

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