Business cycles

Business cycles have been an important part of American business history. For example, severe depressions occurred in 1818-1819, 1837-1843, 1873-1879, and 1929-1933, causing major declines in the standard of living of the average worker. Since the end of World War II, the strength of expansions has greatly exceeded contractions, resulting in significant business prosperity.

The term “business cycle” is slightly misleading, because fluctuations in overall output and related economic indicators do not occur at precisely regular intervals. These economic aggregates, however, do move with a degree of regularity that has been observed in the United States for nearly two hundred years. Business cycles vary greatly in magnitude as well as duration, yet they have certain features in common. First, they are national or international in scope. Second, they have direct impacts on production, employment, wages, prices, retail sales, construction, and international trade. Third, they are persistent, meaning that they last for several years. In general, the expansion in business activity lasts for a longer period of time than the decline. This result has been observed not only in the United States but also in Great Britain, France, and Germany.Business cycles

Principal Features

Most industries and other economic sectors exhibit a fluctuating pattern of economic activity that generally conforms to the overall cyclical movement of the economy. An important exception is the agricultural sector. Agricultural production depends more on the weather and improvements in technology than on overall business conditions. The production of producer and consumer durable goods moves with a high degree of association with overall business conditions, and producer durable goods demonstrate wide cyclical movements in production, employment, and inventories. Fluctuations in production and employment are smaller for nondurable goods and services. One reason is that purchases of nondurable goods and services (items such as food, clothing, and medical care) are less readily postponed in difficult economic times than those of durable goods (such as automobiles).

Private investment expenditures are much smaller in the aggregate than overall consumer spending. However, the level of investment is much more volatile than the level of consumption. Aggregate investment depends critically on business expectations, which can be highly variable over time; consumer expenditures are considerably more stable. The level of business profits varies closely with the overall business cycle and indicates a much greater amplitude of cyclical movements than the level of wages and salaries, dividends, net interest, or rental income.

The level of wholesale prices tends to have wider fluctuations over the course of the business cycle than the levels of retail prices and wages. This is primarily because business-to-business sales (wholesale) are much more variable than sales from business to the consumer (retail). Virtually all recessions or depressions before 1950 were associated with declines in wholesale prices. Since 1950, wholesale prices have never fallen during an economic decline; however, in each of the nine U.S. recessions from 1953 through 2001, there was a temporary reduction in the rate of price increase. In contrast to prices for consumer and producer goods, however, prices of industrial commodities continued to show a high degree of sensitivity to business cycles, often declining even in periods of slow economic growth as well as during absolute declines in overall economic activity.

An increase in Unemploymentunemployment is a universal occurrence in recessions. As new business orders and output decline, workers are laid off. Wage stability prevents workers from easily finding new jobs at lower wage rates. Thus, during the declining phase of the business cycle, unemployment increases. When business revives, unemployment often declines slowly. This is because businesses want to be sure that the cyclical expansion will be sustained before they rehire workers or train new employees. Therefore, in 2002 and 2003, unemployment remained relatively high, even as the economy rebounded from the recession of 2001 and production surpassed prerecession levels.

During severe recessions, such as those in 1973-1975 and 1981-1982, a significant portion of unemployment is characterized as long term. This refers to workers who have been unemployed for fourteen weeks or longer. Long-term unemployment poses a particular problem because the economic resources that families have available, primarily their personal savings and unemployment insurance, often are exhausted after several months.

A Different Cycle

Growth Growth cyclescycles need to be distinguished from business cycles. Most economic fluctuations begin with much-reduced but still positive growth rates, which then develop into actual declines. However, some slowdowns do not result in absolute declines in economic growth and subsequently move into a phase of increased expansion, not recession. This phenomena is known as a growth cycle.

Since 1950, declines in growth in the United States that have not led to actual declines in economic activity occurred in 1951-1952, 1962-1964, 1966-1967, 1979, and 2007. Their adverse effects were felt primarily in areas of particular cyclical sensitivity, notably in housing starts and stock prices. Unemployment ceased declining but did not rise significantly, and profits declined slightly rather than falling dramatically. Thus, the overall impact of any of these slowdowns in economic activity was definitely less than even the mildest of recessions.

Business cycles Summary