MEASURING THE BUSINESS CYCLE

Economists use contractions as a way to document the beginning and end of a business cycle. They can determine when a contraction, or recession, has begun by using a variety of measurements. The common definition of a recession is two consecutive quarterly declines in the gross domestic product (GDP, the total of all goods and services produced within a country). Many economists, however, regard this definition as simplistic because it measures national economic performance according to a single, although important, economic statistic. In short, by looking at only one aspect of national economic activity—the GDP—an evaluation is made of the whole economy.

A more detailed definition of a recession is the one used by the National Bureau of Economic Research (NBER), a nonprofit organization regarded as the official agency for the measurement of business cycles. According to the NBER, a recession is “a period of significant decline in total output, income, employment, and trade, usually lasting from six months to a year, and marked by widespread contractions in many sectors of the economy.”

Using this definition, the NBER has identified nine complete business cycles during the period from 1945 to 1991. The average duration of these business cycles, measured from trough to previous trough—that is, from the end of one recession to the end of the previous recession—is 53 months. During these cycles the average contraction lasted 18 months, and the average expansion lasted 35 months. For the current business cycle an expansion began in March 1991 and ended in March 2001. This expansion covering 120 months was the longest in United States economic history. As of November 2002, the NBER had not declared an official end to the recession that began in March 2001.

Besides differing in length, business cycles differ considerably in degree, especially in the severity of contractions. The most significant contraction in American economic history occurred during the 1930s. This contraction was so severe that it became known as the Great Depression. The NBER marks August 1929 as the start of the Great Depression with an initial contraction that lasted for 43 months. During this downturn the unemployment rate rose from about 3 percent to 25 percent while the production of goods and services fell by 30 percent. A very modest recovery began in March 1933, but the economy experienced another contraction that began in 1937 and lasted for another 13 months. A true economic recovery did not begin until 1941.