Business Cycles in the United States

There are often periods when the economy is growing, everyone is getting a job, wages are increasing, and most people are happy. However, after some period, the economy is going down, everyone fears an imminent recession, people lose their jobs. These periods are known as business cycles. What are business cycles in the United States? What is the history of the business cycles in the United States? How do they impact the economy and our lives? Keep reading and get to the bottom of this article to find the answer to these questions and much more!

History of Business Cycles in the United States

Before we dive into the history of the business cycles in the United States, let's consider what a business cycle is.

These periods generally start with an expansion with a significant increase in the overall output, reaching a certain point, after which economic activity begins to decline. An essential aspect of the business cycle is that all macroeconomic indicators move together.

Aggregate economic activity is not only represented by real (that is, inflation-adjusted) GDP, which is a measure of aggregate output, but also by the aggregate measures of industrial production, employment, income, and sales. These are the critical economic indicators used to determine the peak and trough dates of the U.S. business cycle.

Since 1854, the United States economy has gone through 34 business cycles. Since the beginning of the modern era of macroeconomics following World War II, it has gone through 12 business cycles. This information comes from the National Bureau of Economic Research (NBER), the official arbiter of U.S. business cycles (including the present one in both instances).¹

In the past, a complete economic cycle would typically last for an average of 38.7 months. Still, after 1945, it averaged 58.4 months. Only two prior cycles, the one that occurred from 1961-1969 (106 months) and the one that occurred from 1991-2001 (120 months), managed to continue for a more extended period.¹

During these business cycles, there were significant fluctuations in the unemployment rate, the price level, and the overall output.

Some of the most famous business cycles in the U.S. include:

• The Great Depression
• The Dot-com bubble
• 2008-2009 Financial Crisis

Stages of the Business Cycle

There are two main stages of the business cycle, the first stage is the recession and the second stage is an expansion.

A recession is defined as an economic period in which real GDP (GDP measured in constant prices) falls for at least two consecutive quarters or for six straight months in a run. When the economy hits its maximum level, which is the point at which the real GDP stops growing, the recession starts. It will be over when the economy hits a trough, often known as the turning point or the moment when real GDP stops falling.

A recession is a particular kind of vicious cycle where you have a drop in production, which causes a decrease in employment, income, and sales. As all these factors are correlated, the recession may begin in the industry and quickly spread over to the rest of the economy.

If a recession becomes particularly bad, it might transform into a depression, a condition of the economy characterized by a significant increase in the number of unemployed people, severe shortages, and industrial units that have surplus capacity. Most economic professionals think that the United States only went through one depression in the 20th century and that it occurred in the 1930s during the Great Depression.

As soon as the real GDP begins to stabilize, the economy will enter the second phase, known as expansion, which is a time of recovery after a period of contraction caused by a recession. The continued growth will occur up to the point at which the economy hits a new high point, known as the peak. The present business cycle will close when it does, and a new one will start.

If there were no fluctuations in economic activity, the economy would move along what is known as a trend growth line, which is a path of consistent economic growth.

Business Cycles in the United States Graph

Before we construct the graph of the business cycles in the United States, you should be aware that a couple of metrics are used. Economies do not typically expand at a constant linear or exponential rate but rather go through phases of faster or slower growth and occasional episodes of outright decline in economic activity. In other words, economic growth does not follow a consistent exponential or linear pattern.

The swings in economic activity that occur on a quasi-periodic basis and are known as business cycles include things like production and employment. In most cases, there is an increase in activity that builds up to a high point, also known as a peak, followed by a decrease in production and employment that continues until the economy hits a low point, also known as a trough.

Figure 1. Business Cycles in the United States Graph, StudySmarter Originals. Source: Federal Reserve Bank of St. Louis³

National Bureau of Economic Research uses the unemployment rate to document and showcase business cycles that occurred throughout the history of business cycles in the United States². Using unemployment data from FRED, we've constructed the graph of Business Cycles in the United States shown in Figure 1 above.

Some periods with a significant increase in the unemployment rate include the years 1975, 1980, 2000, 2009, and 2020. All these periods where there was an increase in the unemployment rate, followed by a drop in it, have in common is that all those periods the U.S. had experienced recession and then expansion.

Business Cycles in the United States Labeled

According to NBER, there have been 34 business cycles in the United States.² Below is a partial list of the most famous business cycles in the United States, labeled. We've included some of the most impactful business cycles after the Great Depression.

Business cycles in the United States: labeled table including causes

Bear in mind that there are no uniform causes of business cycles in the United States as it depends on the case by case basis. That's why the table below would be a handy tool for you to get an overview together with the individual causes of the business cycles.