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Business Cycle

consisting of four phases: recovery, expansion, recession, theorists explain the severity of turns in the economy by
and contraction. the coincidence of timing in the individual cycles.

THE PHASES OF A CYCLE DATING OF BUSINESS CYCLES
The transition from phase to phase is described in terms The idea of the timing of individual time series relative to
of the rate of growth of the economy. During the recovery the general level of business implies specific dates for the
phase, the economy turns into a positive growth period business cycle. How does one establish the peaks and
with an increasing rate of growth. During the expansion troughs for the business cycle? To say whether something
period, the economy continues to grow, but gradually at a leads or lags the business cycle, one must have some frame
decreasing rate. After the peak is reached, the rate of of reference; hence, the business cycle is referred to as the
growth will turn negative, causing the economic activity reference cycle and its peaks and troughs as reference turn-
to decline and the economy to slip into recession. The ing points. (See Table 1.)
recession phase is marked by a rapidly declining economy For the United States, the reference turning points are
from its peak. The rate of decline slows down as the cycle established by the National Bureau of Economic Research
approaches its trough and the economy passes through the (NBER), a nonprofit research organization. This organi-
contraction phase. A severe contraction is referred to as a zation, originally under the guidance of Wesley Clair
depression, the type that occurred in 1930s. During the Mitchell (1874–1948), pioneered business cycle research
Great Depression, the output fell by almost 50 percent in the late 1920s. In the early twenty-first century the
and employment by 22 percent. All the recessions since NBER’s decisions regarding the reference cycle are often
then have been shorter in duration and less severe. viewed as infallible, although they are actually quite sub-
jective. No single time series or group of time series is
LENGTH OF BUSINESS CYCLES decreed to be “the” reference cycle. A committee of pro-
The time taken to complete a cycle can vary from cycle to fessional business cycle analysts convened by the NBER
cycle, with the time usually measured from peak to peak establishes the official peaks and troughs in accordance
or trough to trough. Considerable variability of the dura- with the following definition:
tion of business cycles has been observed in the past.
Business cycles are a type of fluctuation found in
Between 1854 and 1982, there were 30 business cycles the aggregate economic activity of nations that
with an average length from trough to trough of 46
organize their work mainly in business enterprises:
months and standard deviation of 16 months. The aver- a cycle consists of expansions occurring at about
age length of the expansion in these cycles was 27 months the same time in many economic activities, fol-
with a standard deviation of 11 months, and the average lowed by similarly general recessions, contrac-
contraction was 19 months with a standard deviation of tions, and revivals which merge in the expansion
13. Though they varied greatly in duration and scope, all phase of the next cycle; this sequence of changes is
of them had some common features. They were national recurrent but not periodic; in duration business
or international in scope; they affected output, employ- cycles vary from more than one year to ten or
ment, retail sales, construction, and other macroeconomic twelve years; they are not divisible into shorter
variables; and they lasted for years, with upward move- cycles of similar character with amplitudes
approximately their own. (Burns and Mitchell,
ment longer than downward movement.
1946, p. 3)

SPECIFIC CYCLES With slight modification, this definition has been
It is sometimes useful to speak of the cycles of specific used since 1927. Although most of the definition is self-
time series; that is, the interest rate cycle, the inventory explanatory, it is not all that rigorous. It does not say
cycle, the construction cycle, and so forth. Given the something like, for example, if the total output of the
diversity of general economic cycles, one can find turns in economy (real GDP) falls at an annual rate of 1 percent
the general level of economic activity in which individual for two consecutive quarters, a recession has begun. The
sectors of the economy do, at least for a time, appear to be definition does say unambiguously that business cycles are
independent of the rest of the economy. The most fre- “recurrent but not periodic.” The only real constraint in
quently mentioned individual cycles are the inventory the definition is that if a business cycle is defined as, say,
cycle, the building or construction cycle, and the agricul- from peak to peak, one should not be able to find another
tural cycle. The standard business cycle is sometimes cycle of equal amplitude between those two peaks. If so,
referred to as the inventory cycle, and some business cycle one did it wrong.

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 63