The business cycle “A wavelike movement in the overall level of business activity”

The Business Cycle þThe term business cycle is used to describe observed fluctuations in key macroeconomic measures such as real GDP, personal income, profits, or employment. þA full cycle consists of an expansion and a contraction (or recession). þBusiness cycles are recurring phenomena; however, they are irregularly recurring. Time Real GDP

The Burns and Mitchell (NBER) definition 1 Business cycles are a type of fluctuation found in aggregate economic activity.... [A] cycle consists of expansions occurring at about the same time in many activities, followed by similarly general recessions, contractions, and revival which merge into the expansion phase of the next cycle; this sequence of change is recurrent but not periodic; in duration cycles vary from one year to 10 to 12 years. 1 Burns, A. and Mitchell, W. Measuring Business Cycles. New York: National Bureau of economic Research, 1947, p. 3

Periodicity “The regularity or predictability with which a particular event recurs.” Christmas has extremely high periodicity Easter has a lesser degree of periodicity than Christmas. Planting season has low periodicity compared to, say, football season. Earthquakes and volcanoes have low periodicity. Recessions (contractions) fall somewhere between earthquakes and planting season

1 Expansion was at 64 months through August, The NBER could date the peak retroactively, however. 2 phases of the cycle Real GDP Year/Month May ‘54 Aug. ‘57 Apr. ‘58 expansion contraction Trough Peak Trend line

Dating business cycles To date business cycle peaks and troughs, economists at the NBER look for well-defined turning points in key “coincident” indicators such as industrial production or nonfarm payrolls

Peak Trough

A “full” business cycle consists of two “half-cycles”—an expansion is one half-cycle and the (chronologically) adjacent contraction is the other half cycle. The table on the following slide gives the record of cycles in the U.S. since 1919, as dated by the NBER

TroughPeakTrough Expansion in Months Contraction in Months Mar 1919Jan 1920July July 1921May 1923July July 1924Oct 1926Nov Nov 1927Aug 1929Mar Mar 1933May 1937June June 1938Feb 1945Oct Oct 1945Nov 1948Oct Oct 1949July 1952May May 1954Aug 1957Apr Apr 1958Apr 1960Feb Feb 1961Dec 1969Nov Nov 1970Nov 1973Mar Mar 1975Jan 1980July July 1980July 1981Dec Dec 1982July 1990Apr Apr 1991????

Running 112 months at the the end of August, 2000, the expansion which began in April 1991 in the U.S. is the longest on record.

Period No. of Cycles covered Mean expansion (in months) Std. Dev. (in months) Mean contractio n (in months) Std. Dev. (in months) Duration of Business Cycles in the U.S. Source: Zarnowitz (1985)

Statistic Depression ( to ) Six Severe Recessions 1 Four Mild Recessions 2 Ave. Duration (Months) % Decline Real GDP % Decline Industrial Production % Decline Nonfarm Employment Duration and Depth of Selected Business Cycles Contractions Source: Zarnowitz (1985) 1 The dates are to ; to ; to ; to ; to ; and to The dates are to ; to ; to ; and to

Economic Activity Stage IStage IIStage III Trough Peak 1 year 2 years The “typical” business cycle

Component Percent Change During Recession 1 Percent Change First Year Percent Change Second Year Consumer Durables Consumer Nondurables Consumer Services Business Fixed Investment Percent Change in Components of GDP Over the Business Cycle 1 Based on the , , , 1980, and recessions. Source: Oyen (1991).

Component Percent Change During Recession 1 Percent Change First Year Percent Change Second Year Residential Construction Inventories Federal purchases State & Local Purchases Percent Change in Components of GDP Over the Business Cycle (Part 2) 1 Based on the , , , 1980, and recessions. 2 Excludes transfer payments Source: Oyen (1991).

Brusca’s Method of Measuring the Comparative Severity of Business Cycle Contractions 1 1 Robert Brusca. “Recession or Recovery?” Challenge (July-August 1992): A quantitative measure of the severity of a recession (contraction) should weigh TWO factors 1.The duration of the recession (in months); and 2.Severity of the recession, as measured by the average actual percentage by which a Coincident Economic Indicator falls short of its trend value during the recession.

Let D denote the duration of the recession (in months); S is the average monthly deviation of a Coincident Indicator from trend (expressed in percentage points); C is the cumulative loss due to recession Thus we have: C = D  S Example: Recession D = 16 months S = -6.8 Thus C = [(16)(-6.8)] =

RecessionAll PayrollsFactory Output Consumer Goods Nov 73-Mar Jan 80-Jul Jul 81-Nov Jul 91-Jan Employment, Real Spending, and Output Loss in Recent Recessions 1 1 Cumulative loss relative to trend in percentage points. Calculated by multiplying the average monthly deviation from trend times the number of months in the recession. Source: Nikko Securities