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1 1 (July 31, 2020)

handle is hein.crs/govdbed0001 and id is 1 raw text is: k~~~~~ 4'&h \1, w- Updated July 31,2020 Introduction to U.S. Economy: The Business Cycle and Growth On June 8, 2020, the National Bureau of Economic Research (NBER), an independent, nonprofit, research group, determined that economic activity in the U.S. peaked in February 2020 and that the economy subsequently entered into a reces sion in the s ame month. On a quarterly basis, economic activity peaked in the fourth quarter of 2019. This In Focus discusses thebusiness cycle,how recessions are determined, and potentialcauses and effects of these fluctuations in the economy. V NNat s the Bu i s cycle Over time, economic activity tends to fluctuate between periods of increasing economic activity, known as economic expansions and 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 economy's movement through these alternating periods of growth and contraction is known as the business cycle. The business cycle has four phases: the expansion, peak, contraction, and trough, as shownin Figure 1. Figure I. Stylized Depiction of the Business Cycle ,\ \..... 4-... ..... ....... ) Source: Congressional Research Service. As the economy moves throughthe business cycle, a number of additional economic indicators tend to shift alongside GDP. During an economic expansion, economy- wide employment, incomes, industrial production, and s ales all tend to increase alongside the rising real GDP. Additionally, over the course of an economic expansion, the rate of inflation tends to increase, although the 2009-2020 expansion showedthat inflationcan remain low while the economy is growing. During a recession, the opposite tends to occur. All of these indicators do not shift s imultaneously, but they tendto shift aroundthe sam tine. 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 notoriou sly difficult due to the irregular pattern of the business cycle; a single quarter of economic data canbe too short to predict a trend, although this was not the case with the Coronavirus Disease 2019 (COVID-19) pandemic. During an expansion, there may also be short periods of decreasing economic activity interspersed within an expansionary period, and vice versa. Business cycles are dated according to the peaks and troughs ofeconomic activity. A single business cycle is dated frompeakto peakor trough to trough. NBER's Business Cycle Dating Committee is generally credited with identifying business cycles in the United States. NBER does not define a recession as two consecutive quarters of declining realGDP, which is apopular metric used by the media. Rather NBER uses a broader definition of a reces sion, 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 realGDP, economy-wide employment, real s ales, and industrial production. Figure presents real GDP fromthe first quarter of 1947 through the second quarter of 2020, along with recessions, as identified by NBER, represented with orange bars. Over this period, real GDP grew at a 3.0% average annual rate. Figure 2. Real GDP and Recessions 1947:Q 1-2020:Q2 iii ii . .:. .. .. Source: U.S. Bureau of Economic Analysis (BEA). Note: Orange 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 2019, the end of the most recent business cycle, the average expansionhas lasted about 65 months, and the average recession has lasted about 11 months. Between the 1850's and WWII, the average expansion lastedles s than half as long (about 26 months), and the average recession las ted about twice as long (about 21 months). The 2009-2020 expansion was thelongest on record, at 128 months. yg

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