BUSINESS CYCLE

Business cycle is the name given to the tendency of all economies to go through periods of economic weakness followed by periods of economic growth. When employment, income, trade, and the production of goods and services declines the economy is said to be in a "recession" or a "contraction." If this downturn is particularly harsh, this part of the business cycle is known as a "depression." Conversely, when employment, income, trade, and the production of goods and services grows over a sustained period of time, the economy is said to be enjoying an "expansion." Thus, the term business cycle describes the full process of economic growth and shrinkage—of "boom" followed by "bust"—that every economy experiences. The causes for changes in the business cycle are as complex as the economy itself, but important factors are over investment, under consumption of goods and services, and the amount of money circulating in the economy. Business cycles can differ greatly in their length, in the number of industries they affect, and in their harshness. Today economists use dozens of statistical measures to try to identify when a business cycle has ended or begun. These include, among others, new factory orders, number of business bankruptcies, stock market performance, new home building, and length of average work week.

Between 1790 and 1990 the United States experienced 44 complete business cycles, each of which lasted about four and a half years (i.e., including both a recessionary period and an expansionary period). In the nineteenth century the recessionary period of the business cycle was usually accompanied by a financial panic in which stock prices fell and banks and businesses went bankrupt. The longest recession in U.S. history during the nineteenth century was between 1873 and 1879. The most severe recession was the Great Depression, which lasted from 1929 to 1939. To understand how disastrous the Great Depression was one should consider that during the recession of 1973–1975 the gross national product fell six percent, while during the Great Depression it fell a staggering 50 percent. Since World War II (1939–1945), however, the business cycle has become much more mild because economists and government leaders know much more about the role the money supply and government fiscal policy can play in affecting the business cycle. When the economy begins to contract, for example, the Federal Reserve can quickly lower interest rates to encourage lending, which stimulates economic growth.