Charting the Business Cycle

Figure 6-3 shows a stylized representation of the way the economy evolves over time. The vertical axis shows either employment or an indicator of how much the economy is producing, such as industrial production or real gross domestic product (real GDP), a measure of the economy’s overall output that we’ll learn about in the next chapter. As the data in Figure 6-2 suggest, these two measures tend to move together. Their common movement is the starting point for a major theme of macroeconomics: the economy’s alternation between short-run downturns and upturns.

Recessions, or contractions, are periods of economic downturn when output and employment are falling.

Expansions, or recoveries, are periods of economic upturn when output and employment are rising.

The business cycle is the short-run alternation between recessions and expansions.

The point at which the economy turns from expansion to recession is a business-cycle peak.

The point at which the economy turns from recession to expansion is a business-cycle trough.

A broad-based downturn, in which output and employment fall in many industries, is called a recession (sometimes referred to as a contraction). Recessions, as officially declared by the National Bureau of Economic Research, or NBER (discussed in the upcoming For Inquiring Minds), are indicated by the shaded areas in Figure 6-2. When the economy isn’t in a recession, when most economic numbers are following their normal upward trend, the economy is said to be in an expansion (sometimes referred to as a recovery).

The Business Cycle This is a stylized picture of the business cycle. The vertical axis measures either employment or total output in the economy. Periods when these two variables turn down are recessions; periods when they turn up are expansions. The point at which the economy turns down is a business-cycle peak; the point at which it turns up again is a business-cycle trough.

Business-Cycle Peak

Business-Cycle Trough

no prior data available

June 185

7October 1860

April 1865

June 1869

October 1873

December 1854

December 1858

June 1861

December 1867

December 1870

March 1879

March 1882

March 1887

July 1890

January 1893

December 1895

May 1885

April 1888

May 1891

June 1894

June 1897

June 1899

September 1902

May 1907

January 1910

January 1913

December 1900

August 1904

June 1908

January 1912

December 1914

August 1918

January 1920

May 1923

October 1926

August 1929

March 1919

July 1921

July 1924

November 1927

March 1933

May 1937

February 1945

November 1948

July 1953

August 1957

June 1938

October 1945

October 1949

May 1954

April 1958

April 1960

December 1969

November 1973

January 1980

July 1981

February 1961

November 1970

March 1975

July 1980

November 1982

July 1990

March 2001

December 2007

March 1991

November 2001

June 2009

Source: National Bureau of Economic Research.

Table :

TABLE 6-2 The History of the Business Cycle

The alternation between recessions and expansions is known as the business cycle. The point in time at which the economy shifts from expansion to recession is known as a business-cycle peak; the point at which the economy shifts from recession to expansion is known as a business-cycle trough.

The business cycle is an enduring feature of the economy. Table 6-2 shows the official list of business-cycle peaks and troughs. As you can see, there have been recessions and expansions for at least the past 155 years. Whenever there is a prolonged expansion, as there was in the 1960s and again in the 1990s, books and articles come out proclaiming the end of the business cycle. Such proclamations have always proved wrong: the cycle always comes back. But why does it matter?