Business Cycle

• Author: Anand Shetty, David Bowers
• Pages: 61-66

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A business cycle refers to the ups and downs of the general level of economic activity for a country. Such changes are normally visible in key macroeconomic measures such as gross domestic product (GDP), real income, employment, industrial output, and wholesale-retail sales. The upward movement in economic activity is referred to as the expansion phase and the downward movement as the contraction phase of the cycle. The turning points of the cycle are called the peak, which is at the end of the expansion phase, and the trough, which is at the end of the contraction phase.

Much attention is paid to the timing of these turning points and the duration of the phases. The expansion phase of the business cycle starts with a short period of recovery before becoming a full-blown expansion. Similarly, a period of recession occurs at the start of the contraction phase. Thus the cycle is generally referred to as

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Table 1

Business cycle expansions and contractions

SOURCE: National Bureau of Economic Research, Inc., 1050 Massachusetts Avenue, Cambridge MA 02133.

Business cycle expansions and contractions
Business cycle reference dates		Duration in months
Trough	Peak	Contraction (trough from previous peak)	Expansion (trough to peak)	Cycle
				Trough from previous trough	Peak from previous peak
1 31 cycles
2 15 cycles
3 26 cycles
4 13 cycles
Notes:
1) Figures printed in bold italic are the wartime expansions (Civil War, World Wars I and II, Korean war and Vietnam war), the postwar contractors, and the full cycles that induce the wartime expansions.
2) The determination that the last contraction ended in November 2001 is the most recent decision of the Business Cycle Dating Committee of the National Bureau of Economic Research.
SOURCE: National Bureau of Economic Research, Inc., 1050 Massachusetts Avenue, Cambridge MA 02133.
December 1854	June 1857	—	30	—	—
December 1858	October 1860	18	22	48	40
June 1861	April 1865	8	46	30	54
December 1867	June 1869	32	18	78	50
December 1870	October 1873	18	34	36	52
March 1879	March 1882	65	36	99	101
May 1885	March 1887	38	22	74	60
April 1888	July 1890	13	27	35	40
May 1891	January 1893	10	20	37	30
June 1894	December 1895	17	18	37	35
June 1897	June 1899	18	24	36	42
December 1900	September 1902	18	21	42	39
August 1904	May 1907	23	33	44	56
June 1908	January 1910	13	19	46	32
January 1912	January 1913	24	12	43	36
December 1914	August 1918	23	44	35	67
March 1919	January 1920	7	10	51	17
July 1921	May 1923	18	22	28	40
July 1924	October 1926	14	27	36	41
November 1927	August 1929	13	21	40	34
March 1933	May 1937	43	50	64	93
June 1938	February 1945	13	80	63	93
October 1945	November 1948	8	37	88	45
October 1949	July 1953	11	45	48	56
May 1954	August 1957	10	39	55	49
April 1958	April 1960	8	24	47	32
February 1961	December 1969	10	106	34	116
November 1970	November 1973	11	36	117	47
March 1975	January 1980	16	58	52	74
July 1980	July 1981	6	12	64	18
November 1982	July 1990	16	92	28	108
March 1991	March 2001	8	120	100	128
November 2001	8	—	—	—
Average, all cycles:
1854–2001 (32 cycles)		17	38	55	556
1854–1919 (16 cycles)		22	27	48	649
1919–1945 (6 cycles)		18	35	53	53
1945–2001 (10 cycles)		10	57	67	67
Average, peacetime cycles:
1854–2001 (27 cycles)		18	33	51	752
1954–1919 (14 cycles)		22	24	46	847
1919–1945 (5 cycles)		20	26	46	45
1945–2001 (8 cycles)		10	52	63	63

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consisting of four phases: recovery, expansion, recession, and contraction.

THE PHASES OF A CYCLE

The transition from phase to phase is described in terms of the rate of growth of the economy. During the recovery phase, the economy turns into a positive growth period with an increasing rate of growth. During the expansion period, the economy continues to grow, but gradually at a decreasing rate. After the peak is reached, the rate of growth will turn negative, causing the economic activity to decline and the economy to slip into recession. The recession phase is marked by a rapidly declining economy from its peak. The rate of decline slows down as the cycle approaches its trough and the economy passes through the contraction phase. A severe contraction is referred to as a depression, the type that occurred in 1930s. During the Great Depression, the output fell by almost 50 percent and employment by 22 percent. All the recessions since then have been shorter in duration and less severe.

LENGTH OF BUSINESS CYCLES

The time taken to complete a cycle can vary from cycle to cycle, with the time usually measured from peak to peak or trough to trough. Considerable variability of the duration of business cycles has been observed in the past. Between 1854 and 1982, there were 30 business cycles with an average length from trough to trough of 46 months and standard deviation of 16 months. The average length of the expansion in these cycles was 27 months with a standard deviation of 11 months, and the average contraction was 19 months with a standard deviation of 13. Though they varied greatly in duration and scope, all of them had some common features. They were national or international in scope; they affected output, employment, retail sales, construction, and other macroeconomic variables; and they lasted for years, with upward movement longer than downward movement.

SPECIFIC CYCLES

It is sometimes useful to speak of the cycles of specific time series; that is, the interest rate cycle, the inventory cycle, the construction cycle, and so forth. Given the diversity of general economic cycles, one can find turns in the general level of economic activity in which individual sectors of the economy do, at least for a time, appear to be independent of the rest of the economy. The most frequently mentioned individual cycles are the inventory cycle, the building or construction cycle, and the agricultural cycle. The standard business cycle is sometimes referred to as the inventory cycle, and some business cycle theorists explain the severity of turns in the economy by the coincidence of timing in the individual cycles.

DATING OF BUSINESS CYCLES

The idea of the timing of individual time series relative to the general level of business implies specific dates for the...