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

2. 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

3. 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

4. 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

5. 1 Expansion was at 64 months through August, 1996. The NBER could date the peak retroactively, however. 2 phases of the 1954-58 cycle Real GDP Year/Month May ‘54 Aug. ‘57 Apr. ‘58 expansion contraction Trough Peak Trend line

6. 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

7. Peak Trough www.bls.gov

8. 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

9. TroughPeakTrough Expansion in Months Contraction in Months Mar 1919Jan 1920July 19211018 July 1921May 1923July 19242214 July 1924Oct 1926Nov 19272713 Nov 1927Aug 1929Mar 19332143 Mar 1933May 1937June 19385013 June 1938Feb 1945Oct 1945808 Oct 1945Nov 1948Oct 19493711 Oct 1949July 1952May 19544510 May 1954Aug 1957Apr 1958398 Apr 1958Apr 1960Feb 19612410 Feb 1961Dec 1969Nov 197010611 Nov 1970Nov 1973Mar 19753616 Mar 1975Jan 1980July 1980586 July 1980July 1981Dec 19821217 Dec 1982July 1990Apr 1991889 Apr 1991????

10. 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.

11. Period No. of Cycles covered Mean expansion (in months) Std. Dev. (in months) Mean contractio n (in months) Std. Dev. (in months) 1854-1897102792417 1897-19331023102010 1933-1982104927113 1854-19823033201812 Duration of Business Cycles in the U.S. Source: Zarnowitz (1985)

12. Statistic Depression (1929.4 to 1933.1) Six Severe Recessions 1 Four Mild Recessions 2 Ave. Duration (Months) 431210 % Decline Real GDP -32.6-3.3-1.7 % Decline Industrial Production -53.4-13.1-7.8 % Decline Nonfarm Employment -31.6-3.8-1.7 Duration and Depth of Selected Business Cycles Contractions Source: Zarnowitz (1985) 1 The dates are 1923.2 to 1924.3; 1948.4 to 1949.4; 1953.3 to 1954.2; 1957.3 to 1958.2; 1973.4 to 1975.1; and 1981.3 to 1982.2. 2 The dates are 1926.4 to 1927.4; 1960.2 to 1961.1; 1969.4 to 1970.4; and 1980.1 to 1980.3

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

14. Component Percent Change During Recession 1 Percent Change First Year Percent Change Second Year Consumer Durables -8.1515.965.50 Consumer Nondurables -5.503.813.55 Consumer Services 1.414.314.59 Business Fixed Investment -8.044.109.17 Percent Change in Components of GDP Over the Business Cycle 1 Based on the 1957-58, 1960-61, 1973-75, 1980, and 1981-82 recessions. Source: Oyen (1991).

15. Component Percent Change During Recession 1 Percent Change First Year Percent Change Second Year Residential Construction -16.3026.035.47 Inventories-153.85258.91-38.35 Federal purchases 2 1.99-3.001.29 State & Local Purchases 2 2.644.252.52 Percent Change in Components of GDP Over the Business Cycle (Part 2) 1 Based on the 1957-58, 1960-61, 1973-75, 1980, and 1981-82 recessions. 2 Excludes transfer payments Source: Oyen (1991).

16. Brusca’s Method of Measuring the Comparative Severity of Business Cycle Contractions 1 1 Robert Brusca. “Recession or Recovery?” Challenge (July-August 1992): 4-15. 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.

17. 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: 1973-75 Recession D = 16 months S = -6.8 Thus C = [(16)(-6.8)] = -108.8

18. RecessionAll PayrollsFactory Output Consumer Goods Nov 73-Mar 75-32-77-115 Jan 80-Jul 80+10-15-29 Jul 81-Nov 82-75-143-98 Jul 91-Jan 82-32-122-81 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