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1 1 (January 4, 2021)

handle is hein.crs/govebbs0001 and id is 1 raw text is: Cong.resoa Reeac Servc S Updated January 4, 2021 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 recession in the same month. On a quarterly basis, economic activity peaked in the fourth quarter of 2019. This In Focus discusses the business cycle, how recessions are determined, and potential causes and effects of these fluctuations in the economy. What Is the Business 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 shown in Figure 1. Figure I. Stylized Depiction of the Business Cycle PPeak !/ 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, although the 2009-2020 expansion showed that inflation can remain low while the economy is growing. During a recession, the opposite tends to occur. 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 singley quarter of economic data can be 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. 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. 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 real GDP, which is a popular metric used by the media. 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 from the first quarter of 1947 through the third quarter of 2020, along with recessions, as identified by NBER, represented with orange bars. Over this period, real GDP grew at a 3.1% average annual rate. Figure 2. Real GDP and Recessions I 947:Q I -2020:Q3 Rea! GDP ($ Bilious} 16,000 12,030_ 0 o 1947 2020 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 expansion has lasted about 65 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 2009-2020 expansion was the longest on record, at 128 months. ittps://crsreports.congress.gt

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