| YouSigma- the web’s most extensive resource for information |
 |
|
|
|
|
Phases of the Business Cycle (Recession and Recovery) |
|
| Download PDF Version |
|
Long-run economic growth in the United States has been interrupted by periods of economic instability. At various times, growth has given way to recession and depression—that is, to declines in real GDP and significant increases in unemployment. At other times, rapid economic growth has been marred by rapid inflation. Both unemployment and inflation often are associated with business cycles.
The term business cycle refers to alternating rises and declines in the level of economic activity, sometimes extending over several years. Individual cycles (one “up” followed by one “down”) vary substantially in duration and intensity. Yet all display certain phases, to which economists have assigned various labels. Figure 1 shows the four phases of a generalized business cycle:
Figure 1:
- Peak - At a peak, such as the middle peak shown in Figure 1, business activity has reached a temporary maximum. Here the economy is near or at full employment and the level of real output is at or very close to the economy’s capacity. The price level is likely to rise during this phase.
- Recession - A peak is followed by a recession—a period of decline in total output, income, employment, and trade. This downturn, which lasts 6 months or more, is marked by the widespread contraction of business activity in many sectors of the economy. But because many prices are downwardly inflexible, the price level is likely to fall only if the recession is severe and prolonged—that is, only if a depression occurs.
- Trough - In the trough of the recession or depression, output and employment “bottom out” at their lowest levels. The trough phase may be either shortlived or quite long.
- Recovery - In the expansion or recovery phase, output and employment rise toward full employment. As recovery intensifies, the price level may begin to rise before full employment and full-capacity production return.
Although business cycles all pass through the same phases, they vary greatly in duration and intensity. Many economists prefer to talk of business “fluctuations” rather than cycles because cycles imply regularity while fluctuations do not. The Great Depression of the 1930s resulted in a 40 percent decline in real GDP over a 3-year period in the United States and seriously impaired business activity for a decade. By comparison, more recent U.S. recessions, detailed in Table 2, were relatively mild in both intensity and duration.
Phase of the Business Cycle |
Period |
Length of Recession |
Length of Ensuing Growth |
Peak Unemployment Rate |
GDP Decline |
Comments |
The “Inventory Recession” |
1948-1949 |
11 Months |
Not Applicable |
7.9% |
1.6% |
Post-war demand for goods tapered off by late 1948. Income rose due to tax cuts, according to a National Bureau of Economic Research case study, but Americans put those pay increases into savings. |
Mild Recession |
1953-1954 |
10 Months |
Not Applicable |
6.1% |
2.6% |
The national Bureau of Economic Research called this the mildest post-war recession and attributed it to high inflation after the Korean War. |
The “Eisenhower Recession” |
1957-1958 |
8 Months |
Not Applicable |
7.5% |
3.7% |
This was the worst recession since the Great Depression of the 1930s, according to a 1958 Time magazine article. Some culprits: High steel and oil inventories and disappointing auto sales, including Ford’s Edsel. |
High-Level Stagflation |
1960-1961 |
10 Months |
Not Applicable |
7.1% |
1.1% |
A short downturn spurred by decreased manufacturing. Oil demand was steady but house-building leveled off. In a 1960 Time magazine story, a retail executive called the downturn “a mild thing.’ |
A Pause in Growth |
1969-1970 |
11 Months |
Not Applicable |
6.1% |
1% |
Inflation hit as government hadn’t raised enough taxes to pay for its social programs. Economist Solomon Fabricant called it a mild ‘growth recession’ or a ‘slowdown.’ |
Stagflation |
1973-1975 |
16 Months |
Not Applicable |
9.0% |
3.4% |
The oil embargo caused inflation, but unemployment also was high—an unusual phenomenon called ‘stagflation.’ The budget deficit grew and foreign competition made inroads importing cheaper goods. |
Turbulence |
1980-1981 |
7 Months |
12 Months |
7.8% |
4.1% |
The short recession came as a result of the Fed restricting the money supply that had sent inflation soaring. Interest rates shot up. A short-lived growth spurt followed as President Regan took office. |
A Deep Recession |
1961-1962 |
16 Months |
Not Applicable |
10.8% |
2.9% |
This downturn hit farms particularly hard. But while painful in the moment, this downturn is credited with breaking the vicious cycle that had sent inflation skyrocketing over the past decade. |
The Mysterious Recession |
1990-1991 |
9 Months |
Not Applicable |
6.9% |
1.3% |
MIT economist Oliver Blanchard noted that some economists thought that this downturn was caused by the 80’s expansion ‘dying of old age.’ He blamed a sudden decline in consumer spending. |
Dark Days |
2001 |
8 Months |
Not Applicable |
Not Available |
1% |
This era may not have become a recession, but accounting scandals and terrorist attacks in September 2001 profoundly rattled the economy. Still, the recession was short-lived. |
Too Early to Tell Recession |
2008 |
12 Months for Sure – and Too Early to tell |
Not Applicable |
6.7% as of November 2008. |
2.25% as of November 2008. |
The White House issued a statement pointing to numerous factors that contributed to the weakness, including record high energy prices, housing and credit concerns, two major hurricanes, and a prolonged Boeing strike. |
The manager who understands the causes and consequences of recessions (downturns in the overall economy) or inflation (rising prices) can make more intelligent business decisions during those periods.
References:
McConnell−Brue. (2004). Economics. The McGraw−HillCompanies.
Harvard Business Publishing. (2008). Brief History of Recessions.
Cnn Money. (October 2008).