Business Cycle Facts

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Business Cycle Facts
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Real Output of the U.S. economy
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Introduction

• Since the Industrial Revolution, the economies of
  the US, like many other countries, have grown
  tremendously.
• This long-term economic expansion has been
  periodically interrupted by temporary declines in
  economic activities and then followed by
  recovery.

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Introduction
Long-run Economic Growth
Aggregate Economic Activities
Business Cycles
Time
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Introduction

• The observed changes in aggregate economic
  activity can be decomposed into two parts
• Long-run economic growth the changes in economic
  performance over a long period of time, say
  between 1870 and 2007.
• Business cycles fluctuations in economic
  activities about the long-run trend.

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What is a business cycle?
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What is a business cycle ?

• Lucas defines the business cycle as the recurrent
  fluctuations of output about trend and the
  co-movements among other aggregate time series.
• Other, important, aggregate time series include
  employment, aggregate investment, inflation rate
  etc.

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Recessions

• The period of time during which aggregate
  economic activity falls below trend is a
  contraction or recession.
• If the recession is particularly severe, it
  becomes a depression.
• During a recession, many sectors of the economy
  experience declining sales and production, and
  workers are laid off or forced to work only
  part-time.

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Expansions

• After reaching the low point of the contraction
  (the trough), aggregate economic activity begins
  to increase.
• The period of time during which aggregate
  economic activity grows above trend is an
  expansion or a boom.
• The high point of the expansion is called a peak.
  
• A complete cycle is measured from peak to peak or
  trough to trough.

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Key business cycle facts

• (which any successful theory is supposed to
  explain)

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Persistent deviations from trend in GDP High
correlation between hours worked and GDP.
Source Prescotts Nobel lecture
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Consumption is relatively smooth while investment
is more volatile than output (deviations in both
variables are positively correlated with output
deviations)
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Business cycles are recurrent, not predictable,
and asymmetric

• they do not occur at regular, predictable
  intervals of time (in fact no one knows for sure
  when they will happen)
• they do not last for a fixed or predetermined
  length of time (once a cycle begins no one knows
  for sure when it will end).
• Business cycles are often asymmetric the
  contraction period is short and sudden, the
  expansion period is long and slow.

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Cyclical Behavior of Economic Variables

• An economic variable that moves in the same
  direction as real GDP is called procyclical.
• An economic variable that moves in the opposite
  direction to real GDP is called countercyclical.

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Procyclical Variable
Real GDP
Procyclical variable
Time
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Countercyclical Variable
Real GDP
Countercyclical variable
Time
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Cyclical Behavior of Economic Variables

• An economic variable is a leading variable if it
  tends to move in advance of real GDP.
• This means the peaks and troughs in a leading
  variable occur before the corresponding peaks and
  troughs in real GDP.
• Economic observers are interested in economic
  variables that consistently lead the business
  cycle because they use such variables to forecast
  the future course of the economy (of course
  consistent relations can suddenly break down!)

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Leading Variable
Real GDP
Leading variable
Time
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Business Cycle Facts (1)
Variable Direction Timing
Consumption Procyclical Coincident
Business Fixed Investment Procyclical Coincident
Residential Investment Procyclical Leading
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Business Cycle Facts (2)
Variable Direction Timing
Employment Procyclical Coincident
Unemployment Countercyclical
Inflation Procyclical Lagging
Stock Prices Procyclical Leading