THE PHASES OF A CYCLE

The transition from phase to phase is described in terms
of the rate of growth of the economy. During the recovery
phase, the economy turns into a positive growth period
with an increasing rate of growth. During the expansion
period, the economy continues to grow, but gradually at a
decreasing rate. After the peak is reached, the rate of
growth will turn negative, causing the economic activity
to decline and the economy to slip into recession. The
recession phase is marked by a rapidly declining economy
from its peak. The rate of decline slows down as the cycle
approaches its trough and the economy passes through the
contraction phase. A severe contraction is referred to as a
depression, the type that occurred in 1930s. During the
Great Depression, the output fell by almost 50 percent
and employment by 22 percent. All the recessions since
then have been shorter in duration and less severe.
LENGTH OF BUSINESS CYCLES
The time taken to complete a cycle can vary from cycle to
cycle, with the time usually measured from peak to peak
or trough to trough. Considerable variability of the duration
of business cycles has been observed in the past.
Between 1854 and 1982, there were 30 business cycles
with an average length from trough to trough of 46
months and standard deviation of 16 months. The average
length of the expansion in these cycles was 27 months
with a standard deviation of 11 months, and the average
contraction was 19 months with a standard deviation of
13. Though they varied greatly in duration and scope, all
of them had some common features. They were national
or international in scope; they affected output, employment,
retail sales, construction, and other macroeconomic
variables; and they lasted for years, with upward movement
longer than downward movement.
SPECIFIC CYCLES
It is sometimes useful to speak of the cycles of specific
time series; that is, the interest rate cycle, the inventory
cycle, the construction cycle, and so forth. Given the
diversity of general economic cycles, one can find turns in
the general level of economic activity in which individual
sectors of the economy do, at least for a time, appear to be
independent of the rest of the economy. The most frequently
mentioned individual cycles are the inventory
cycle, the building or construction cycle, and the agricultural
cycle. The standard business cycle is sometimes
referred to as the inventory cycle, and some business cycle
theorists explain the severity of turns in the economy by
the coincidence of timing in the individual cycles.
DATING OF BUSINESS CYCLES
The idea of the timing of individual time series relative to
the general level of business implies specific dates for the
business cycle. How does one establish the peaks and
troughs for the business cycle? To say whether something
leads or lags the business cycle, one must have some frame
of reference; hence, the business cycle is referred to as the
reference cycle and its peaks and troughs as reference turning
points. (See Table 1.)
For the United States, the reference turning points are
established by the National Bureau of Economic Research
(NBER), a nonprofit research organization. This organization,
originally under the guidance of Wesley Clair
Mitchell (1874–1948), pioneered business cycle research
in the late 1920s. In the early twenty-first century the
NBER’s decisions regarding the reference cycle are often
viewed as infallible, although they are actually quite subjective.
No single time series or group of time series is
decreed to be “the” reference cycle. A committee of professional
business cycle analysts convened by the NBER
establishes the official peaks and troughs in accordance
with the following definition:
Business cycles are a type of fluctuation found in
the aggregate economic activity of nations that
organize their work mainly in business enterprises:
a cycle consists of expansions occurring at about
the same time in many economic activities, followed
by similarly general recessions, contractions,
and revivals which merge in the expansion
phase of the next cycle; this sequence of changes is
recurrent but not periodic; in duration business
cycles vary from more than one year to ten or
twelve years; they are not divisible into shorter
cycles of similar character with amplitudes
approximately their own. (Burns and Mitchell,
1946, p. 3)
With slight modification, this definition has been
used since 1927. Although most of the definition is selfexplanatory,
it is not all that rigorous. It does not say
something like, for example, if the total output of the
economy (real GDP) falls at an annual rate of 1 percent
for two consecutive quarters, a recession has begun. The
definition does say unambiguously that business cycles are
“recurrent but not periodic.” The only real constraint in
the definition is that if a business cycle is defined as, say,
from peak to peak, one should not be able to find another
cycle of equal amplitude between those two peaks. If so,
one did it wrong.