Ups and Downs of Economic Activity Peak Trough Recovery Recession

Business Cycles √ The term business cycle refers to the recurrent ups and downs in the level of economic activity, which extend over several years. √ Individual business cycles may vary greatly in duration and intensity. √ All display a set of phases.

THE BUSINESS CYCLE Phases of the Business Cycle PEAK RECESSION TROUGH Level of business activity Time RECESSION TROUGH RECOVERY GROWTH TREND

PEAK √ Peak or prosperity phase: Time GROWTH TREND Level of business activity √ Peak or prosperity phase: Real output in the economy is at a high level Unemployment is low Domestic output may be at its capacity Inflation may be high.

RECESSION GROWTH TREND Time √ Contraction or recession phase: Level of business activity Time RECESSION GROWTH TREND √ Contraction or recession phase: Real output is decreasing Unemployment rate is rising. As contraction continues, inflation pressure fades. If the recession is prolonged, price may decline (deflation) The government determinant for a recession is two consecutive quarters of declining output.

TROUGH √ Trough or depression phase: Lowest point of real GDP Level of business activity Time TROUGH GROWTH TREND √ Trough or depression phase: Lowest point of real GDP Output and unemployment “bottom out” This phase may be short-lived or prolonged There is no precise decline in output at which a serious recession becomes a depression.

RECOVERY √ Expansionary or recovery: GROWTH TREND Level of business activity Time √ Expansionary or recovery: Real output in the economy is increasing Unemployment rate is declining The upswing part of the cycle.

Business Cycle-one cycle through 4 phases Peak Peak Real GDP per year Recovery Recession Trough Time One cycle

Recessions since 1950 show that duration and depth are varied: Period Duration in months Depth (decline in real GDP) 1953-54 10 — 3.0% 1957-58 8 — 3.5% 1960-61 10 — 1.0% 1969-70 11 — 1.1% 1973-75 16 — 4.3% 1980 6 — 3.4% 1981-82 16 — 2.6% 1990-91 8 — 2.6% 2001 8 app. —3.3%

How Indicators Monitor the Four Phases of the Business Cycle • The Leading Indicator System … provides a basis for monitoring the tendency to move from one phase to the next. …assesses the strengths and weaknesses in the economy … gives clues to a quickening or slowing of future rates of economic growth … indicates the cyclical turning points in moving from the upward expansion to the downward recession, and from the recession to the upward recovery.

Leading indicators anticipate the direction in which the economy is headed. The coincident indicators provide information about the current status of the economy changing as the economy moves from one phase of the business cycle to the next 2) telling economists that an upturn or downturn in the economy has arrived. Lagging indicators change months after a downturn or upturn in the economy has begun and help economists predict the duration of economic downturns or upturns.

These actions generate the four phases of the business cycle. Based on the theory that expectations of future profits are the motivating force in the economy. Companies may expand production of goods and services and investment in new structures and equipment,when business executives believe that their sales and profits will rise. When they believe profits will decline, they reduce production and investment. These actions generate the four phases of the business cycle.

Causes of Fluctuations Innovation Political events Random events Wars Level of consumer spending Seasonal fluctuations Cyclical Impacts — durable and non durable

An Actual Business Cycle 1981 - 1990 ($ billion, 1992 dollars) Real GDP ‘80 ‘85 ‘90 4600 5200 6000 Peak Peak Trough 82 One Cycle 3 3 3

The Great Depression

The Great Depression [continued]

Great Depression Stats

Global Depression, 1929-1932 Ave. Unemployment Rate, 1925-1928 Percent Decrease in Prices, 1929-1932

Six Million “Rosie the Riveters” World War II Production of these items brought us out of the Great Depression. 300,000 warplanes 124,000 ships 289,000 combat vehicles and tanks 36 billion yards of cotton goods 41 billion rounds of ammunition 2.4 million military trucks 111,527 tank guns and howitzers $288 billion was spent on the war, $100 billion in the first six months. Unemployment hit an all-time low of 1.2% and personal savings were 25.5%.