Log In Start studying!

Select your language

Suggested languages for you:
StudySmarter - The all-in-one study app.
4.8 • +11k Ratings
More than 3 Million Downloads
Free
|
|

Business Cycles in the United States

Business Cycles in the United States

There are often periods when the economy is growing, everyone is getting a job, wages are increasing, and most people are happy. However, after some period, the economy is going down, everyone fears an imminent recession, people lose their jobs. These periods are known as business cycles. What are business cycles in the United States? What is the history of the business cycles in the United States? How do they impact the economy and our lives? Keep reading and get to the bottom of this article to find the answer to these questions and much more!

History of Business Cycles in the United States

Before we dive into the history of the business cycles in the United States, let's consider what a business cycle is.

A business cycle refers to periods of growth or decline in the overall economic activity of a country.

These periods generally start with an expansion with a significant increase in the overall output, reaching a certain point, after which economic activity begins to decline. An essential aspect of the business cycle is that all macroeconomic indicators move together.

Aggregate economic activity is not only represented by real (that is, inflation-adjusted) GDP, which is a measure of aggregate output, but also by the aggregate measures of industrial production, employment, income, and sales. These are the critical economic indicators used to determine the peak and trough dates of the U.S. business cycle.

Since 1854, the United States economy has gone through 34 business cycles. Since the beginning of the modern era of macroeconomics following World War II, it has gone through 12 business cycles. This information comes from the National Bureau of Economic Research (NBER), the official arbiter of U.S. business cycles (including the present one in both instances).1

In the past, a complete economic cycle would typically last for an average of 38.7 months. Still, after 1945, it averaged 58.4 months. Only two prior cycles, the one that occurred from 1961-1969 (106 months) and the one that occurred from 1991-2001 (120 months), managed to continue for a more extended period.1

During these business cycles, there were significant fluctuations in the unemployment rate, the price level, and the overall output.

When the economy is at a growing phase, output increases, leading to more people being hired. All these people then consume, which fuels the growth further. However, this continues up to some point where due to an external shock, the economic activity declines. Businesses produce less output, therefore hiring less, which drops consumer confidence and demand.

Some of the most famous business cycles in the U.S. include:

  • The Great Depression
  • The Dot-com bubble
  • 2008-2009 Financial Crisis

Stages of the Business Cycle

There are two main stages of the business cycle, the first stage is the recession and the second stage is an expansion.

A recession is defined as an economic period in which real GDP (GDP measured in constant prices) falls for at least two consecutive quarters or for six straight months in a run. When the economy hits its maximum level, which is the point at which the real GDP stops growing, the recession starts. It will be over when the economy hits a trough, often known as the turning point or the moment when real GDP stops falling.

A recession is a particular kind of vicious cycle where you have a drop in production, which causes a decrease in employment, income, and sales. As all these factors are correlated, the recession may begin in the industry and quickly spread over to the rest of the economy.

Think about it: businesses will employ fewer people if less production happens and lay off some of their current workforce. What happens next? You have less income, therefore, consumer demand drops, which causes businesses to lose money, causing the output to fall further. This domino effect is essential to the spread of recession across the economy, which drives the comovement among various coincident economic indicators and the continuation of the downturn.

If a recession becomes particularly bad, it might transform into a depression, a condition of the economy characterized by a significant increase in the number of unemployed people, severe shortages, and industrial units that have surplus capacity. Most economic professionals think that the United States only went through one depression in the 20th century and that it occurred in the 1930s during the Great Depression.

As soon as the real GDP begins to stabilize, the economy will enter the second phase, known as expansion, which is a time of recovery after a period of contraction caused by a recession. The continued growth will occur up to the point at which the economy hits a new high point, known as the peak. The present business cycle will close when it does, and a new one will start.

If there were no fluctuations in economic activity, the economy would move along what is known as a trend growth line, which is a path of consistent economic growth.

Learn more in our article: Business Cycles.

Business Cycles in the United States Graph

Before we construct the graph of the business cycles in the United States, you should be aware that a couple of metrics are used. Economies do not typically expand at a constant linear or exponential rate but rather go through phases of faster or slower growth and occasional episodes of outright decline in economic activity. In other words, economic growth does not follow a consistent exponential or linear pattern.

The swings in economic activity that occur on a quasi-periodic basis and are known as business cycles include things like production and employment. In most cases, there is an increase in activity that builds up to a high point, also known as a peak, followed by a decrease in production and employment that continues until the economy hits a low point, also known as a trough.

Business Cycles in the United States, Business Cycles in the United States Graph, StudySmarterFigure 1. Business Cycles in the United States Graph, StudySmarter Originals. Source: Federal Reserve Bank of St. Louis3

National Bureau of Economic Research uses the unemployment rate to document and showcase business cycles that occurred throughout the history of business cycles in the United States2. Using unemployment data from FRED, we've constructed the graph of Business Cycles in the United States shown in Figure 1 above.

Some periods with a significant increase in the unemployment rate include the years 1975, 1980, 2000, 2009, and 2020. All these periods where there was an increase in the unemployment rate, followed by a drop in it, have in common is that all those periods the U.S. had experienced recession and then expansion.

Business Cycles in the United States Labeled

According to NBER, there have been 34 business cycles in the United States.2 Below is a partial list of the most famous business cycles in the United States, labeled. We've included some of the most impactful business cycles after the Great Depression.

Business cycles in the United States: labeled table including causes

Bear in mind that there are no uniform causes of business cycles in the United States as it depends on the case by case basis. That's why the table below would be a handy tool for you to get an overview together with the individual causes of the business cycles.

Great DepressionThe Great Depression started in 1929 and lasted until 1933. The United States had a financial panic and a fall in the money supply, both aggravated by the worldwide commitment to the gold standard during this time. A severe economic downturn was brought on by a combination of circumstances, including extensive new tariffs. The gross domestic product, industrial output, employment, and prices all decreased significantly. A modest economic growth occurred during the Great Depression in 1933, brought on by an increase in the quantity of gold in circulation and an improvement in people's levels of optimism.
The 1973 Oil CrisisThe 1973 Oil crisis is one of the most critical recessions in U.S. history. This economic downturn lasted 16 months, beginning in November 1973 and ending in March 1975. The OPEC oil embargo is one of the main factors that caused the 1973 recession. Due to political instability between the United States and some OPEC countries, the supply of oil was capped, which caused the price of it to skyrocket. As a result, the supply of goods and services dropped, causing stagflation in the economy.
Dot-com bubbleThis recession lasted 8 months, from March 2001 to November 2001. The 1990s consisted of a period of significant growth in U.S. history. This was when the internet had just begun, and many investors were investing considerable money in the new companies related to the internet. Numerous dot-com companies were overvalued, which contributed to their failure. This continued until the dot-com bubble popped, bringing a decade of growth to an end.
Great RecessionBeginning in December 2007 and ending in June 2009, the Great Recession was probably one of the most impactful business cycles in the U.S. after the Great Depression. This was caused by significant growth in the U.S. real estate market, where the housing prices across the country skyrocketed. Additionally, there were subprime mortgages consisting of pools of loans traded between banks. The loans in these pools weren't advanced to individuals who could pay them back. Once some of them defaulted, a domino effect brought about the worst financial crisis of our modern history.

We have detailed explanation for the Great Depression, Oil Crisis (1973), Dot-com Bubble, and 2008 Financial Crisis. If you want to learn what happened in details during these periods, feel free to check them out!

Business Cycles in the United States - Key takeaways

  • A business cycle refers to periods of growth or decline in the overall economic activity of a country.
  • There are two main stages of the business cycle, the first stage is the recession and the second stage is an expansion.
  • A business cycle consist of an expansion, a peak, a recession, and a trough.
  • Some of the most famous business cycles in the U.S. include: The Great Depression, The dot-com bubble, and the 2008-2009 Financial Crisis.

References

  1. National Bureau of Economic Research, US Business Cycle Expansions and Contractions, https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions
  2. National Bureau of Economic Research, Business Cycle Dating, https://www.nber.org/research/business-cycle-dating
  3. Federal Reserve Bank of St. Louis, Unemployment Rate, May 2022, https://fred.stlouisfed.org/series/UNRATE

Frequently Asked Questions about Business Cycles in the United States

The United States is currently in an expansionary cycle.

In the past, a complete economic cycle would typically last for an average of 38.7 months. Still, after 1945, it averaged 58.4 months. Only two prior cycles, the one that occurred from 1961-1969 (106 months) and the one that occurred from 1991-2001 (120 months), managed to continue for a more extended period.

Since 1854, the United States economy has gone through 34 business cycles.

A typical US business cycle is 58.4 months on average.

The US economy is currently in an expansion.

Final Business Cycles in the United States Quiz

Question

What is a business cycle?

Show answer

Answer

A business cycle refers to periods of growth or decline in the overall economic activity of a country.

Show question

Question

What is an important aspect of a business cycle?

Show answer

Answer

An essential aspect of the business cycle is that all macroeconomic indicators move together.

Show question

Question

What represents the aggregate economic activity?

Show answer

Answer

Aggregate economic activity is not only represented by real (that is, inflation-adjusted) GDP, which is a measure of aggregate output, but also by the aggregate measures of industrial production, employment, income, and sales.

Show question

Question

What is the use of aggregate economic activity indicators?

Show answer

Answer

These indicators are used to determine the peak and trough dates of the U.S. business cycle. 

Show question

Question

How many business cycles United States experienced?

Show answer

Answer

Since 1854, the United States economy has gone through 34 business cycles. 

Show question

Question

Who is the official arbiter of business cycles in the United States?

Show answer

Answer

The National Bureau of Economic Research (NBER)

Show question

Question

What are the two main stages of the business cycle?

Show answer

Answer

There are two main stages of the business cycle, the first stage is the recession and the second stage is an expansion.

Show question

Question

What is recession?

Show answer

Answer

A recession is defined as an economic period in which real GDP (GDP measured in constant prices) falls for at least two consecutive quarters or for six straight months in a run. When the economy hits its maximum level, which is the point at which the real GDP stops growing, the recession starts. It will be over when the economy hits a trough, often known as the turning point or the moment when real GDP stops falling.


Show question

Question

What is the trough?

Show answer

Answer

The point where real GDP stops falling, also known as the turning point.

Show question

Question

Explain depression

Show answer

Answer

If a recession becomes particularly bad, it might transform into a depression, a condition of the economy characterized by a significant increase in the number of unemployed people, severe shortages, and industrial units that have surplus capacity. 

Show question

Question

What is expansion?

Show answer

Answer

As soon as the real GDP begins to stabilize, the economy will enter the second phase, known as expansion, which is a time of recovery after a period of contraction caused by a recession.

Show question

Question

What is peak?

Show answer

Answer

The highest point the economic growth reaches before experiencing economic decline.

Show question

Question

What would happen if there were no economic fluctuations?

Show answer

Answer

If there were no fluctuations in economic activity, the economy would move along what is known as a trend line, which is a path of consistent growth. 

Show question

Question

What are some of the most famous business cycles in the United States?

Show answer

Answer

Some of the most famous business cycles in the U.S include: The Great Depression, The dot-com bubble, and the 2008-2009 Financial Crisis.

Show question

Question

What happened during the Great Depression?

Show answer

Answer

The Great Depression started in 1929 and lasted until 1933. The United States had a financial panic and a fall in the money supply, both aggravated by the worldwide commitment to the gold standard during this time. A severe economic downturn was brought on by a combination of circumstances, including extensive new tariffs. The gross domestic product, industrial output, employment, and prices all decreased significantly. A modest economic growth occurred during the Great Depression in 1933, brought on by an increase in the quantity of gold in circulation and an improvement in people's levels of optimism.

Show question

60%

of the users don't pass the Business Cycles in the United States quiz! Will you pass the quiz?

Start Quiz

Discover the right content for your subjects

No need to cheat if you have everything you need to succeed! Packed into one app!

Study Plan

Be perfectly prepared on time with an individual plan.

Quizzes

Test your knowledge with gamified quizzes.

Flashcards

Create and find flashcards in record time.

Notes

Create beautiful notes faster than ever before.

Study Sets

Have all your study materials in one place.

Documents

Upload unlimited documents and save them online.

Study Analytics

Identify your study strength and weaknesses.

Weekly Goals

Set individual study goals and earn points reaching them.

Smart Reminders

Stop procrastinating with our study reminders.

Rewards

Earn points, unlock badges and level up while studying.

Magic Marker

Create flashcards in notes completely automatically.

Smart Formatting

Create the most beautiful study materials using our templates.

Sign up to highlight and take notes. It’s 100% free.

Get FREE ACCESS to all of our study material, tailor-made!

Over 10 million students from across the world are already learning smarter.

Get Started for Free
Illustration