8.4: Measuring The Business Cycle

The stages of the business that we just saw are distinct and regular. But since economic activity is erratic and difficult to codify, an understanding of the data requires that you have answers to the following questions:

• Who is in charge of monitoring and measuring the business cycle?
• What economic activity is monitored when tracking the business cycle?
• How are the turning points in the business cycle determined?

Economists generally acknowledge the National Bureau of Economic Research (NBER) as the official body that determines the turning points (troughs and peaks) in the business cycle.

The NBER, founded in 1920, is a private, nonprofit, nonpartisan research organization dedicated to studying the business cycle. Members of the NBER's Business Cycle Dating Committee determine the turning points in every business cycle (see figure 4). On June 8, 2020, the Business Cycle Dating Committee announced that the near 11-year U.S. economic expansion (stages 2 and 3 of the business cycle) had come to an end in February 2020. This expansion lasted 128 months and was the longest in US history. This means that February 2020 is designated the peak turning point of the business cycle and the start of a new recession.

How did the NBER determine the U.S. economy fell into recession in February 2020? The NBER defines a recession as the following:

A recession is a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in expansion. Expansion is the normal state of the economy; most recessions are brief, and they have been rare in recent decades.

Because the NBER takes such a broad sampling of economic activity to determine if the business cycle has reached a turning point, it does not rely on GDP as its sole source of economic data. The NBER explains the reasoning behind its methodology with the following:

Because a recession influences the economy broadly and is not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The traditional role of the committee is to maintain a monthly chronology, so the committee refers almost exclusively to monthly indicators. The committee gives relatively little weight to real GDP because it is only measured quarterly and it is subject to continuing, large revisions.

Based on these criteria, the NBER has recorded U.S. economic activity since 1894. They summarize their analysis of that data in a table titled US Business Cycle Expansions and Contractions that lists the dates of the troughs and peaks of the last 31 business cycles. In order to understand the background to the NBER's decisions, be sure to read the frequently asked questions (FAQs) posted by the NBER Business Cycle Dating Committee, at the end of the announcement of the business cycle peak of February 2020.

Given the fact that each business cycle is different in some way, it is not surprising that they differ in duration.

So, you now know that it is crucial to interpret economic indicators in the context of the business cycle. The business cycle will help determine if the period-to-period changes in economic indicators are a change in, or a continuation of, a trend. You also know how the business cycle is defined and measured.

US Business Cycle

Figure 5

Figure 5 displays the year-over-year percentage change in real GDP) from 1990-2024. It highlights the cyclical nature of economic growth, showing periods of expansion and contraction, with recessions shaded in gray.

Note that the recession of the early 2000s, which was relatively mild. Unlike most recessions, GDP growth never dipped into negative territory, although it did slow significantly. This period, often associated with the dot-com bubble burst, saw economic uncertainty but did not result in a deep contraction like later recessions. The economy recovered without a sharp decline in overall output.

In contrast, the 2008 financial crisis led to a short and much more pronounced downturn, with GDP contracting sharply. This recession, triggered by the housing market collapse and financial instability, saw prolonged economic weakness, with growth taking several years to return to pre-crisis levels. The recovery was relatively slow compared to other downturns, reflecting the severity of the financial system's distress.

The most striking feature of the graph is the sharp recession in 2020, caused by the COVID-19 pandemic. Unlike previous recessions, this downturn was extremely steep, with GDP plunging rates not seen since the Great Depression of the 1930s. However, the recovery was also unusually rapid, forming what is often called a "V-shaped" recovery. Government stimulus measures and the reopening of businesses contributed to a swift rebound in economic activity, although fluctuations continued in the following years.