See Business Cycle Theories
See American Business Cycle
Unemployment rises when national output declines, while inflation climbs when productive capacity shrinks or pressure is exerted for output to exceed an economy’s capacity.
Periods of economic expansion and contraction alternate over a business cycle.
Expansions seem to be lengthening, while contractions tend to be shorter than in earlier periods. Consequently, most economists are optimistic that an improved ability to measure and adapt to cyclic pressures may help us avoid the violent fluctuations of earlier times. Less traumatic disruptions, however, will undoubtedly continue to nag all societies.
• A Typical Business Cycle The comparatively smooth business cycle extracted in Figure 2 shows how cycles are divisible into four subperiods: (a) the peak or boom, (b) a recession or contraction (c) a depression or trough, and (d) a recovery or expansion. The severity of a cycle is somewhat subjective,2 but smooth fluctuations are rare. Expansions have lasted from as little as 10 months to as long as 108 months, while contractions have ranged from 7 months to 65 months in length. Notice that long contractions (e.g., 1929–1940) may be followed by short expansions (1940–1944), and vice versa (e.g., 1981–1983 and 1984–1990).
Turning Points in Business Cycles
Methodical analyses of business cycles began in 1920 with the founding of the National Bureau for Economic Research, a privately funded think tank. Tracing economic history is now a relatively systematic process, but forecasting remains an inexact science. Nevertheless, sophisticated models are used to simultaneously forecast every major sector of the economy.
Unemployment rates and the Dow Jones stock index are among the more than 5,000 data series now used to analyze and date U.S. business cycles. Troughs of the cycle occur when most measures of business activity indicate low points; peaks are dated when most data point to cyclic highs. These turning points are unofficial until the next peak or trough is passed. For example, the latest trough, tentatively dated November 1990, will not be official until the expansion that began in 1991 is at an end.
Social Aspects of the Business Cycle
Emphasizing the losses of output and income during economic downturns sometimes causes analysts to lose sight of social losses from recessions: waves of crime, illness, and breakdowns of family structures. Marriage and divorce are both positively related to economic swings. Many couples who face hard times delay marriage. Rates of illegitimate birth soar, and unhappy couples postpone divorce. Changes in marital status seem to be luxuries demanded primarily when income is secure. Would you be as prone to marry if your job seemed insecure? Would couples with young children be as apt to divorce during hard times?
Protracted downturns also trigger epidemics of stress-related diseases: heart attacks, alcoholism, mental illness,etc. Suicide rates were 60% to 70% above normal during the depths of the Great Depression, reflecting the gloom caused by forced idleness and sharp losses of income. One study indicates that roughly 260 more males aged 20 to 60 years commit suicide annually with each 1% hike in unemployment rates. Widespread unemployment also tends to fill prisons. Fraud, robberies, and other property crimes soar when legitimate income-earning opportunities shrink. Violence also becomes more widespread during recessions, while prosperity reduces most crime rates.
Policymakers feel pressure from voters to react to the repercussions of severe downturns. Social Security, unemployment compensation, and other relief systems were enacted in the 1930s to aid victims of the Great Depression. Recent recessions have tended to be shorter and milder, but the social maladies of business cycles have not evaporated.