Business Cycles

Business Cycles:

Who Determines a Business Cycle: NBER: National Bureau of Economic Research Tracks business cycles. (Tables on pgs. 50-51 in text) A private, non-profit, non-partisan research organization founded in 1920. Business Cycle Dating Committee (key player) Looks at increases and decreases in overall economic activity to establish business cycle dates. Record of business cycles starts for December 1854.

Business Cycles: There are four phases to a business (economic) cycle. Expansion Peak Contraction Trough The Y axis is level of real GDP and the X axis is time.

Business Cycle: Expansion In this part of the cycle the economy is growing. Real GDP is increasing and unemployment is falling. Incomes and consumption of goods and services rise. Businesses expand. Period of optimism. According to NBER: “during expansion, economic activity rises substantially, spreads across the economy and usually lasts for several years.”

Business Cycle: Peak The peak is the end of the expansion period. The turning point: highest point after expansion. Warning signs of the contraction to come. Inventories begin to build up A decrease in production Employment will decrease in the future. Sales will decline Overall employment may not decrease during the peak but there are signs of things to come.

Business Cycle: Contraction Economy is slowing, the period between the peak and trough. Economic activity is falling over time. Unemployment increases because GDP is declining. Wages and Income fall. Consumption decreases. Business reduce their investment expenses. Prices may fall. Period of pessimism.

Business Cycle: Trough Lowest point of the business cycle. GDP has fallen to a low point. Unemployment is high. Like a peak, a trough is a turning point. May be signs that the economy is improving. Lower prices encourage spending. Low interest rates encourage borrowing. The period after a trough can be called a recovery – particularly after a recession or depression- rather than an expansion.

Movement Along the Cycle:

Recession: Period between a peak and trough. Media and textbooks will define as a period of two or more consecutive quarters of declining real GDP. This is not the official NBER definition, though most periods classified as recessions by NBER meet this definition. Official NBER definition: “a significant decline in economic activity spreading across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and whole- sale-retail sales.”

Depression: Defined as a severe recession. NBER does not identify or date depressions, and there are no set rules for when a recession becomes a depression. In the United States the term depression is usually used to refer to the Great Depression of the 1930s.

Differing Effects of the Business Cycle: While the trends and characteristics of the phases of business cycles for the overall economy can be revealing. They don’t always reflect what is happening to each individual, family, or business. Important to remember that business cycles affect people differently. For example during a period of expansion certain businesses can fail and people can become unemployed. Conversely during a period of contraction certain parts of the country can experience regional growth.

Causes of the Business Cycle: There are many different theories about what causes a business cycle. Dealing with business cycles will be discussed later on in the quarter. Forecasting? A Difficult task to try (Econometrics) The Conference Board, is a non-profit organization that provides research to help businesses improve their performance. They do this by using Leading Indicators. Designed to predict turning points and how the economy will perform in the future. A measure of economic performance that tends to go up or down before the economy does as a whole.

Business Cycles through U.S. History: Great Depression After WWII Volcker Recession The Great Recession (2007-2009) Today?

The Great Depression: The Great Depression (1929-39) was the deepest and longest-lasting economic downturn in the history of the Western industrialized world. Stock Market Crash Tuesday October 29th 1929 “Black Thursday” October 24th, investors started to dump their stocks. Caused a panic, people took all of their money out of the banks, causing banks to fail. Depression is decided to have ended in 1940-1941 with the buildup of war spending to support the US and Allies in WWII.

Great Depression-continued: Business Cycle during: Economy peaked in August 1929 Contracted for 43 months! Trough in March 1933 Another contraction May 1937-June 1938 Real GDP fell 27%!!! from 1929 to 1933 Greater decrease than in any recession since. Presidents during: Herbert Hoover (1929-1933): republican Believed in little government intervention Franklin Delano Roosevelt (1933-1945): democrat Believed in government intervention: New Deal Program “….the only ting we have to fear is fear itself”

After World War II: Building on the economic base left after the war (a focus on industry), American society became more affluent in the postwar years than most Americans could have imagined before or during the war. Baby boom: 1946-1964 The War caused more women to enter the workforce. This prosperity lasted until the early 1970s.

Volcker Recession (‘80s): Paul Volcker was the Federal Reserve Chairman Wanted to “whip” inflation. (Inflation- a steady increase in price levels- was extremely high in the 70s) Oil crises (Miracle) Increased interest rates Car dealers, who were especially affected by high interest rates, sent coffins containing the car keys of unsold vehicles. Policies caused the greatest recession in the United States since the Great Depression. Lasted 3 years. Inflation was “defeated” but at what cost? Unemployment rose heavily during this period.

The Great Recession: The US economy was steadily growing from the late 1980s until the early 2000s. The Recession began with the bursting of the housing bubble. People were taking out money from the bank for more than their houses were worth. Irresponsible lending was to blame for a lot of the troubles. Large financial institutions began to fail: the people they had loaned the money to could no longer pay it back. Unemployment higher than in the Volcker Recession. Peaked at 10%. Officially lasted from December 2007 to June 2009

United States Today: Economic inequality is considered a large problem, economically and politically. Recovery from the Great Recession has been very sluggish, not quite at pre-recession levels. Recent quarters have shown greater growth. Other countries, such as China and India, have shown great economic growth. Concerns about the US losing it’s world power status. Outlook for 2015 varies but is generally positive.