111-1Business Cycles11-2Agenda• What is a Business Cycle?• Business Cycle Facts.11-3What Is a Business Cycle? • Business cycles are the short-run fluctuations in aggregate economic activity around its long-run growth path.11-4What Is a Business Cycle? TimeY211-5What Is a Business Cycle? • Components of a Business Cycle:¾ Peak,¾ Contraction or Recession,¾ Trough, and¾ Recovery and Expansion.11-6What Is a Business Cycle? • Peak: ¾ The maximum level that aggregate economic activity reaches.• Can only be determined after the fact.• Generally, Y > Yn.11-7What Is a Business Cycle? • Contractions, Recessions, or Hard Landing: ¾ Popular definition: • 2 or more consecutive quarters of declining real GDP.¾ Official definition: • A period of significant decline in total output, income, employment, and trade, • usually lasting from 6 months to a year, and • marked by widespread contractions in many sectors of the economy.11-8What Is a Business Cycle? • Growth Recession or Soft Landing:¾ Official definition:• A recurring period of slow growth in total output, income, employment, and trade,• usually lasting a year or more.¾ Actual growth rate is less than natural growth rate, resulting in a rising unemployment rate.311-9What Is a Business Cycle? • Depression:¾ A recession that is major in both scale and duration.11-10What Is a Business Cycle? • Trough: ¾ The minimum level that aggregate economic activity reaches.• Can only be determined after the fact.• Generally Y < Yn.11-11What Is a Business Cycle? • Expansion: ¾ Official definition:• A period of significant increase in total output, income, employment, and trade,• usually lasting 6 months or more, and• marked by widespread expansion in many sectors of the economy.11-12What Is a Business Cycle? • Boom:¾ An extended economic expansion where aggregate economic activity is high and rising. • Y is well above Yn.411-13What Is a Business Cycle? • Expansions and contractions:¾ The sequence from one peak to the next, or from one trough to the next, is a business cycle.¾ Peaks and troughs are called turning points.• Turning points are officially designated by the NBER Business Cycle Dating (BCD) Committee.• Typically wait 9 – 24 months afterthe fact before deciding on turning points.11-14What is a Business Cycle?11-15What Is a Business Cycle? • Main features of a business cycle:¾ Pervasive in nature,¾ Recurrent but not periodic,¾ Persistent, and¾ Each cycle differs in length and severity.• Expansions are longer than recessions.11-16What Is a Business Cycle? • Business cycle are pervasive in nature.¾ Business cycles are fluctuations in aggregateeconomic activity, not fluctuations in a specific economic variable.• Significant changes in total output, income, employment, and trade.511-17What Is a Business Cycle? • Business cycle are recurrent:¾ The pattern of contraction–trough–expansion–peak occurs over and over again.• Business cycles are not periodic:¾ Business cycles do not occur at regular, predictable intervals.11-18What Is a Business Cycle? • Business cycles are persistent:¾ Declines in aggregate economic activity are followed by further declines; growth in aggregate economic activity is followed by more growth.• Because of persistence, forecasting turning points is quite important.11-19What Is a Business Cycle? • Business cycles differ in length and severity:¾ Recessions are fairly short; expansions are fairly long.11-20What is a Business Cycle?Length of Business Cycle Contractions81110810111661688051015201945 1948 1953 1957 1960 1969 1973 1980 1981 1990 2001Business Contraction Beginning in:Number of Months611-21What is a Business Cycle?Length of Business Cycle Expansions37453924106365812921207502550751001251501945 1949 1954 1958 1961 1970 1975 1980 1982 1991 2001Business Expansion Beginning in:Number of Months11-22What Is a Business Cycle? • Main points about business cycles:¾ Business cycles are pervasive in nature, i.e., they are fluctuations in aggregate economic activity, not a specific economic variable.¾ Business cycle are recurrent, but not periodic.¾ Business cycles are persistent.¾ Business cycles differ in length and severity.11-23Business Cycle Turning Points11-24Business Cycle Facts • The cyclical behavior of economic variables:¾ Economic variables show co-movement.• They have regular and predictable patterns of behavior over the course of the business cycle.• Macroeconomic variables can be classified by direction, timing, and volatility of their movement with aggregate economic activity.711-25Business Cycle Facts • The cyclical behavior of economic variables:¾ Direction:• What is the direction of a variable’s movement relative to aggregate economic activity?– Procyclical: moves in the same direction.– Countercyclical: moves in the opposite direction.– Acyclical: moves with no clear pattern.11-26Business Cycle Facts • The cyclical behavior of economic variables:¾ Timing:• What is the timing of a variable's movements relative to aggregate economic activity?– Leading: moves in advance.– Coincident: moves at the same time.– Lagging: moves afterwards. 11-27Business Cycle Facts • The cyclical behavior of economic variables:¾ Leading indicators have been used to predictpeaks and troughs of the business cycle.• Generally, several leading variables are combined into an index of leading economic indicators.• A decline in the index for 3 to 6 months warns of a recession.11-28Business Cycle Facts • The cyclical behavior of economic variables:¾ Leading indicators have not been that useful in predicting recessions.• Although the data are available promptly, they are often revised.– Sometimes signals change without warning.• A number of false warnings have been given.• Provides little information about the timing or severity of a recession.811-29Business Cycle Facts Composite Index of 10 Leading Indicators % Change - Year to Year 2004=10005009590858075706560Source: The Conference Board /Haver Analytics22.515.07.50.0-7.5-15.022.515.07.50.0-7.5-15.011-30Business Cycle Facts • The cyclical behavior of economic variables:¾ Leading indicators suffer from 2 other issues:• Structural changes in the economy necessitate periodic revision of the index.• Recessions are often caused by sudden shocks to the economy that leading indicators will not pick up.11-31Business Cycle