The business cycle

1
The business cycle
A wavelike movement in the overall level of
business activity
2
The Business Cycle
Real GDP
Time

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

3
The Burns and Mitchell (NBER) definition1
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.
1Burns, A. and Mitchell, W. Measuring Business
Cycles. New York National Bureau of economic
Research, 1947, p. 3
4
PeriodicityThe 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
2 phases of the 1954-58 cycle
Peak
Real GDP
Trough
Trough
Trend line
contraction
expansion
Year/Month
May 54
Aug. 57
Apr. 58

1Expansion was at 64 months through August, 1996.
The NBER could date the peak retroactively,
however.
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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
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Peak
Trough
www.bls.gov
8
A full business cycle consists of two
half-cyclesan 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 cyclesin the U.S.
since 1919, as dated by the NBER
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(No Transcript)
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
Duration of Business Cycles in the U.S.
Source Zarnowitz (1985)
12
Duration and Depth of Selected Business Cycles
Contractions Source Zarnowitz (1985)
1The 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. 2The
dates are 1926.4 to 1927.4 1960.2 to 1961.1
1969.4 to 1970.4 and 1980.1 to 1980.3
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The typical business cycle
Peak
Economic Activity
Trough
Trough
Stage I
Stage II
Stage III
1 year
1 year
2 years
14
Percent Change in Components of GDP Over the
Business Cycle
1Based on the 1957-58, 1960-61, 1973-75, 1980,
and 1981-82 recessions.
Source Oyen (1991).
15
Percent Change in Components of GDP Over the
Business Cycle (Part 2)
Source Oyen (1991).
1Based on the 1957-58, 1960-61, 1973-75, 1980,
and 1981-82 recessions. 2Excludes transfer
payments
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Bruscas Method of Measuring the Comparative
Severity of Business Cycle Contractions1

• A quantitative measure of the severity of a
  recession (contraction) should weigh TWO factors
• The duration of the recession (in months) and
• 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.

1Robert Brusca. Recession or Recovery?
Challenge (July-August 1992) 4-15.
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

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Employment, Real Spending, and Output Loss in
Recent Recessions1
1Cumulative 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