Business cycles

Business cycles are the patterns of increase and decreases in GROSS DOMESTIC PRODUCT (GDP) that occur in an econ­omy. Most countries’ economies have tended to grow over time, but within the trend of overall growth there have been periods of expansion, peaks, contractions, and troughs, followed again by expansion. The movement of an economy through periods of expansion and contraction is called a business cycle.

In the United States the longest period of economic expansion began with a trough in the first quarter of 1991 and continued until 2001. Since 1929 there have been 12 RECESSIONs, or periods of economic contraction. During the 1930 election, President Herbert Hoover claimed the country was not in a recession, just a mild depression. Since then a severe and prolonged recession has been called a depression. The longest period of recession in U.S. history, the GREAT DEPRESSION, lasted from 1929 to 1934. One saying suggested the distinction between a recession and a depression was that “in a recession your neighbor is unemployed; in a depression, you are too!”

During the Great Depression, GDP declined by one-third and UNEMPLOYMENT rose to 25 percent. Economists continue to analyze and debate the causes of the Great Depression and the causes of business cycles. Changes from economic expansion to contraction are caused by shifts in aggregate DEMAND, aggregate SUPPLY, or combina­tions of both. Changes in business INVESTMENT, CONSUMP­TION spending, government purchases, fluctuations in EXPORTING, and IMPORTS, and changes in a country’s MONEY SUPPLY all impact overall demand and supply in an econ­omy. Discovery of new resources, wars, political upheavals, technological innovation, immigration, and population growth have all been suggested as factors contributing to business cycles. In the 19th century, sunspot cycles were suggested to have been similar to business cycles.

Economists try to predict business cycles. If businesses can anticipate changes in the economy, they can prepare for expansion and contractions in economic activity. If governments can anticipate changes in the economy, they can intervene with fiscal and MONETARY POLICY changes to reduce the severity of business cycle troughs and to sustain periods of economic expansion.

Economists use leading INDICATORS to predict changes in business cycles. Leading indicators, as the term suggests, shift in advance of changes in the economy. Changes in unemployment claims, stock prices, new plant and equip­ment expenditures, new building permits, and consumer expectations all tend to precede changes in economic out­put. Leading indicators are less than perfect predictors of business cycles, leaving business managers and policy makers uncertain about future changes in the economy.