PeakPeak

TroughTrough

Recovery

Recovery

Recessio

n

Recessio

n

PeakPeak

√ The term The term business cyclebusiness cycle refers refers

to the recurrent ups and downs in the to the recurrent ups and downs in the

level of economic activity, which level of economic activity, which

extend over several years. extend over several years.

√ √ Individual business cycles may Individual business cycles may

vary greatly in duration and intensity.vary greatly in duration and intensity.

√ √ All display a set of phases.All display a set of phases.

Business CyclesBusiness Cycles

THE BUSINESS CYCLETHE BUSINESS CYCLEPhases of the Business CyclePhases of the Business Cycle

PEAKPEAK

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Time

RECESSIONRECESSION TROUGHTROUGH RECOVERYRECOVERY

GROWTH

GROWTH

TREND

TREND

PEAKPEAK

Time

GROWTH

GROWTH

TREND

TREND

√ √ Peak or prosperity phase: Peak or prosperity phase: Real output in the economy is at a Real output in the economy is at a high levelhigh level Unemployment is low Unemployment is low Domestic output may be at its Domestic output may be at its capacitycapacity Inflation may be high.Inflation may be high.

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√ √ Contraction or recession phase:Contraction or recession phase: Real output is decreasing Real output is decreasing Unemployment rate is rising. Unemployment rate is rising. As contraction continues, inflation pressure fades.As contraction continues, inflation pressure fades. If the recession is prolonged, price may decline (deflation) If the recession is prolonged, price may decline (deflation) The government determinant for a recession is two The government determinant for a recession is two

consecutive quarters of declining output. consecutive quarters of declining output.

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RECESSIONRECESSIONGRO

WTHGRO

WTH

TREND

TREND

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Time

TROUGHTROUGH

GROWTH

GROWTH

TREND

TREND

√ √ Trough or depression phase:Trough or depression phase: Lowest point of real GDPLowest point of real GDP Output and unemployment “bottom out”Output and unemployment “bottom out” This phase may be short-lived or prolongedThis phase may be short-lived or prolonged There is no precise decline in output at which a There is no precise decline in output at which a

serious recession becomes a depression. serious recession becomes a depression.

Lev

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RECOVERYRECOVERY

GROWTH

GROWTH

TREND

TREND

√ √ Expansionary or recovery: Expansionary or recovery:

Real output in the economy is increasing Real output in the economy is increasing

Unemployment rate is decliningUnemployment rate is declining

The upswing part of the cycle. The upswing part of the cycle.

PeakPeak

TroughTrough

One cycleOne cycle

Recovery

Recovery

Rea

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yea

rp

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ear

Recession

Recession

TimeTime

PeakPeak

Business Cycle-one cycle through 4 phasesBusiness Cycle-one cycle through 4 phasesBusiness Cycle-one cycle through 4 phasesBusiness Cycle-one cycle through 4 phases

Recessions since 1950 show that duration and Recessions since 1950 show that duration and depth are varied:depth are varied:

PeriodPeriod Duration in monthsDuration in months DepthDepth (decline in real GDP)

1953-541953-54 1010 — 3.0%— 3.0%1957-581957-58 88 — 3.5%— 3.5%1960-611960-61 1010 — 1.0%— 1.0%1969-701969-70 1111 — 1.1%— 1.1%1973-751973-75 1616 — 4.3%— 4.3%19801980 6 6 — 3.4%— 3.4%1981-821981-82 1616 — 2.6%— 2.6%1990-911990-91 88 — 2.6%— 2.6%20012001 88 app. —3.3% app. —3.3%

• • The Leading Indicator SystemThe Leading Indicator System… … provides a basis for monitoring the provides a basis for monitoring the

tendency to move from one phase to the next.tendency to move from one phase to the next.……assesses the strengths and weaknesses in the assesses the strengths and weaknesses in the

economy economy … … gives clues to a quickening or slowing of gives clues to a quickening or slowing of

future rates of economic growth future rates of economic growth … … indicates the cyclical turning points in indicates the cyclical turning points in

moving from the upward expansion to the downward moving from the upward expansion to the downward recession, and from the recession to the upward recession, and from the recession to the upward recovery.recovery.

How Indicators Monitor the How Indicators Monitor the Four Phases of the Business CycleFour Phases of the Business Cycle

How Indicators Monitor the How Indicators Monitor the Four Phases of the Business CycleFour Phases of the Business Cycle

Leading indicators anticipate the Leading indicators anticipate the directiondirection in which in which

the economy is headed. the economy is headed.

The coincident indicators The coincident indicators provide informationprovide information

about the current status of the economyabout the current status of the economy

1)1) changing as the economy moves from one changing as the economy moves from one

phase of the business cycle to the next phase of the business cycle to the next

2) telling economists that an upturn or downturn 2) telling economists that an upturn or downturn

in the economy has arrived. in the economy has arrived. Lagging indicators change months after a downturn Lagging indicators change months after a downturn

or upturn in the economy has begun and help or upturn in the economy has begun and help

economists economists predictpredict the duration of economic the duration of economic

downturns or upturns.downturns or upturns.

Based on the theory that Based on the theory that expectations of future expectations of future

profits are the motivating force in the economy. profits are the motivating force in the economy.

Companies may expand production of goods and Companies may expand production of goods and

services and investment in new structures and services and investment in new structures and

equipment,when business executives believe that equipment,when business executives believe that

their sales and profits will rise.their sales and profits will rise.

When they believe profits will decline, they reduce When they believe profits will decline, they reduce

production and investment.production and investment.

These actions generate the four phases of the These actions generate the four phases of the

business cycle.business cycle.

Innovation Innovation

Political eventsPolitical events

Random eventsRandom events

Wars Wars

Level of consumer spendingLevel of consumer spending

Seasonal fluctuationsSeasonal fluctuations

Cyclical Impacts — durable and non durableCyclical Impacts — durable and non durable

Causes of FluctuationsCauses of FluctuationsCauses of FluctuationsCauses of Fluctuations

An Actual Business CycleAn Actual Business Cycle1981 - 1990 ($ billion, 1992 dollars)1981 - 1990 ($ billion, 1992 dollars)

An Actual Business CycleAn Actual Business Cycle1981 - 1990 ($ billion, 1992 dollars)1981 - 1990 ($ billion, 1992 dollars)

Real GDP

PeakPeak

PeakPeak

TroughTrough

One CycleOne Cycle

‘80 ‘85 ‘90

4600

5200

6000

82

The Great DepressionThe Great Depression

The Great Depression [continued]The Great Depression [continued]

Great Depression StatsGreat Depression Stats

Ave. Unemployment Rate, 1925-1928Ave. Unemployment Rate, 1925-1928

Ave. Unemployment Rate, 1929-1933Ave. Unemployment Rate, 1929-1933

Percent Decrease in Prices, 1929-1932Percent Decrease in Prices, 1929-1932

Global Depression, 1929-1932Global Depression, 1929-1932

Six Million “Rosie the Riveters”Six Million “Rosie the Riveters”

World War II Production of these items brought us out World War II Production of these items brought us out of the Great Depression.of the Great Depression.300,000 warplanes300,000 warplanes124,000 ships124,000 ships289,000 combat vehicles and tanks289,000 combat vehicles and tanks36 billion yards of cotton goods36 billion yards of cotton goods41 billion rounds of ammunition41 billion rounds of ammunition2.4 million military trucks2.4 million military trucks111,527 tank guns and howitzers111,527 tank guns and howitzers

•$288 billion$288 billion was spent on the war, was spent on the war, •$100$100 billion in the first six months. billion in the first six months.

Unemployment hit an all-time low of Unemployment hit an all-time low of 1.2%1.2% and personal savings were 25.5%. and personal savings were 25.5%.