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1 1 (January 8, 2019)

handle is hein.crs/govxzi0001 and id is 1 raw text is: ~* Congressional Research Service Informing the legislative debate since 1914 Updated January 8, 2019 Introduction to U.S. Economy: The Business Cycle and Growth What is the Business Cycle? Over time, modern industrial economies tend to experience significant variations in economic activity. The economy shifts from periods of increasing economic activity, known as economic expansions, to periods of decreasing economic activity, known as recessions. Real gross domestic product (GDP)-total economic output adjusted for inflation-is the broadest measure of economic activity. The movement of the economy through these alternating periods of growth and contraction is known as the business cycle. There are four phases of the business cycle: the expansion, peak, contraction, and trough, as shown in Figure 1. Figure I. Stylized Depiction of the Business Cycle Peak Peak a e u e Expansion Groth Trend Contriction Troug Time Source: Congressional Research Service. As the economy moves through the business cycle, a number of additional economic indicators tend to shift alongside GDP. During an economic expansion, economy- wide employment, incomes, industrial production, and sales all tend to increase alongside the rising real GDP. Additionally, over the course of an economic expansion, the rate of inflation tends to increase. During a recession, the opposite tends to occur, with decreasing employment, incomes, production, sales, and a decrease in the rate of inflation, occurring alongside falling real GDP. All of these indicators do not shift simultaneously, but they tend to shift around the same time. Although these fluctuations in economic activity are referred to as a cycle, the economy generally does not exhibit a regular and smooth cycle as shown in Figure 1. Predicting recessions and expansions is notoriously difficult due to the irregular pattern of the business cycle; a single quarter of economic data is likely too short to be predictive of a trend. During an expansion there may also be short periods of decreasing economic activity interspersed within an expansionary period, and vice versa. Dating the Business Cycles Business cycles are dated according to the peaks and troughs of economic activity. A single business cycle is dated from peak to peak, or trough to trough. The Business Cycle Dating Committee at the National Bureau of Economic Research (NBER), an independent, nonprofit, research group, is generally credited with identifying business cycles in the United States. NBER does not define a recession as two consecutive quarters of declining real GDP, which is popular in the financial press. Rather NBER uses a broader definition of a recession, as a period where there is a significant decline in economic activity that spreads across the economy. NBER uses a number of indicators to measure economic activity, including real GDP, economy-wide employment, real sales, and industrial production. Figure 2 presents real GDP between 1948 and part of 2018, along with recessions, as identified by NBER, represented with grey bars. Over this period, real GDP grew at an average annual pace of 3.2%. Figure 2. Real GDP and Recessions 1948:Q 1-2018:Q3 Real GDP {$ Billions) 20,000 o 1948 2018 Source: US. Bureau of Economic Analysis. Note: Grey bars represent recessions as defined by NBER. The economy tends to experience longer periods of expansion than contraction, especially since World War II (WWII). Between 1945 and 2009, the end of the most recent business cycle, the average expansion has lasted about 58 months, and the average recession has lasted about 11 months. Between the 1850's and WWII, the average expansion lasted less than half as long (about 26 months), and the average recession lasted about twice as long (about 21 months). The most recent recession in the United States, the so-called Great Recession, began in December 2007 and ended in June 2009, a total of 18 months. Since the 1850's, in the United States, 13 recessions have lasted as long as or longer than the Great Recession; however, all other recessions occurred before the Great Depression of the 1930's. The current economic expansion has been underway for 116 /crsreports.congress.gc

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