The Four Stages Found in a Business Cycle Essay

A business cycle

Basically, a business cycle refers to a progression of economic activities found within a state’s economy which are classically characterized through four phases namely recession, growth, decline and recovery that reiterate over time. However, economists note that comprehensive business cycles tend to fluctuate in lengths (Knoop, pp. 12). This implies that the durations of the business cycles might fall within a time span of virtually two to about twelve-years with nearly all cycles averaging almost six years in extent. Actually, the phrase ‘business cycle’ is primarily correlated to larger national, industry- wide and regional business trends.

Major economic variables used in defining business cycles

Heightened research on what caused the business cycles led to the determination of various factors that primarily shaped the disposition and direction of regional, industry, and national specific economies. The distinguished key variables that were used in defining the business cycles included investment spending, governments spending, as well as imports and exports fluctuations. The variation in the investment spending volatility was actually deemed to be amongst the most essential business cycles factors. For instance, in the United States business cycles, investment spending was proved to be a persistently volatile factor of the total or aggregate demand (Knoop, pp.11). It tends to vary more from period to period as compared to the largest aggregate demand component known as the consumption expenditure.

Fluctuation in government spending is yet another factor that caused business cycles fluctuations. Being widely considered as a stabilizing economic force rather than the basis for economic instability or fluctuations, variations in government spending can significantly impact the business cycles. Finally, an economy’s imports and exports fluctuations can also cause eminent disturbances in the business cycle because the net export constitutes an economy’s aggregate demand.

Characteristics of recession based on key economic variables

In the business cycles, a recession is usually characterized by declining trends in economic activities. The aggregate demands are perceived to be very low and this is attributable to the fluctuations in the key economic variables namely the net exports, government spending, and investment spending. Basically, the investment spending volatility is a key factor that has for long dictated the US business cycles. In fact, during the periods when an economy is in a recession, the investment levels are seen to have declined. For instance, the 1929 great depression was a result of the collapse in investment spending which saw a decline in the aggregate demand. The deceleration in the investment during the recession periods further causes a downward response in the sales trends (Knoop, pp.106). When an economy is in a recession, investment spending is seen to decline hence causing the overall output to decline.

Conversely, during World War II for example, increased government spending resulted in the expansion of economic activities. However, the recession periods that came afterwards, between 1953 and 1954 was evidently attributable to the government spending reductions. Therefore, a recession is marked by a decrease in the level of government expenditure which in turn lowers the aggregate demand. On the other hand, fluctuations experienced in the imports and export levels also mark periods in the business cycle that can possibly lead to recession. During recession periods, the levels of imports seem to surpass the overall levels of exports and this gives rise to negative net exports. Since net export is a component of an economy’s aggregate demand, during the recession the level of net export declines causing a general decrease in the level of economic growth as well as the domestic income. Moreover, as recession persists, the demand for foreign goods and services in the domestic economy reduces thereby creating minimal exportation opportunities.

The United States recessions from 1960-2010, and the key causative factors

According to Knoop (65) the United States has experienced various economic recessions from1960 since 2010. For instance, in 1960¸ a recession which lasted for about ten months starting from April 1960 was apparent. The gross domestic product (GDP) was -1.9% in the second quarter and -5.1% in the fourth quarter. During this period, unemployment rose and attained a peak in May 1961 of 7.1%. Another recession was experienced in 1970. Although it was moderately mild, it lasted for eleven months causing the GDP to go down in two quarters (Q). In Q1, GDP was -0.7%; in Q2, GDP was 0.7%; Q3 had a GDP of 3.6% and in Q4, the GDP was -4.2%. In December 1970, the unemployment rate peaked at approximately 6.1%.

Between 1973 and 1975, OPEC was blamed for yet another recession that lasted for 16 months.

This was attributed to the quadrupling prices in 1973; the printing of more by the US after going off the gold-standard; the institution of wage prices controls by President Nixon which reduced the demand for commodities due to high prices and the laying-off of employees due to high wage rates. There were three successive quarters of depressing GDP growth rates: In Q3 (1974), GDP was -39% and Q4 had a GDP of -1.6%. In 1975, Q1 had a GDP of -4.8% while the overall unemployment rate reached nine percent in May 1975. This was two months later after the recession had ended (Knoop, pp. 6).

The 1980 to 1982 recessions went for twenty two months, and it was partially attributed to the oil embargo in Iran which caused prices to go up. The business spending was reduced as a result of the raised rates of interest. Negative GDP was recorded in six out of twelve quarters with -7.9% being the worst experienced in Q2 of 1980. In Q1 of 1982, the unemployment rate rose from 6.4% (1981) to 10.8% in 1982. Conversely, the loans and savings crisis of 1989 caused another recession between 1990 and 1991 that lasted for eight months. In 1990’s Q4, a -3.5% GDP was recorded whereas in Q1 of 1991, the GDP was -1.9%. The preceding periods went without a recession until another eight months recession arose in fiscal 2001.

The booms and busts in the internet businesses that were caused by Y2K scare significantly contributed to the recession. The September 11 attacks also aggravated the recession which forced the economy to contract for two quarters. For instance, Q1 had -1.3% while Q3 had -1.1% with unemployment reaching 5.7% during this recession. The unemployment further rose in 2003 to 6%. Ever since the great-depression, the worst recession was witnessed between 2008 and 2009. The entire economy shriveled in five consecutive quarters (Knoop, pp.65). In fact, two quarters contracted above 5%. Nevertheless, in the third quarter of 2009, the recession ended when a positive GDP was realized after an economic stimulus-spending. In the fiscal 2008, Q1= -0.7%; Q2=1.5%; Q3=-2.7% and Q4=-5.4%. In 2009, Q1=-6.4% and Q2=-0.7%. The major cause of the recession was the sub-prime mortgage crisis that brought about a universal banking credits-crisis.

The proposed and legislated specific fiscal policies to curb recessions

The proposed expansionary policies during the 1980s involved the tax reductions and the enlargement in the government expenses especially increased spending in defense. While these policies were close to that applied in the 1960s it supported the supply side argument. The argument was that reduction in the rate of tax especially those with high margins will create employment. For example, the policy brought back the venture tax credit which encouraged savings. With the increased employment rates resulting from the increased investment by firms there is a firm indication that the long-run aggregate supply curve will shift to the right very rapidly and thus invigorating the economy.

The government expansionary policies were again proposed in the 2000s with the president arguing for large tax reductions. The tax reductions were later implemented with the increased spending on defense and other state welfare policies such as Medicare and Medicaid. The increased government expenditure coupled with huge reduction in tax rates stimulated the economy but only temporarily. Conversely the government deficits continued to swell even though the economy grew slightly with the increase in government expenditure.

Effectiveness of the fiscal policies

The proposed slicing of taxes as well as enlarged government expenditure resulted in the doubling of federal deficits. Deficits and government spending are inversely proportional as can be evidenced by the fiscal policies that were implemented by the governments. The economic growth caused by these expansionary policies was very temporary. The continued fall of the economy into recession especially in the late 2000s raised many questions on the use of these fiscal policies. To counter the recession fiscal policies must be accompanied by adequate and appropriate expansionary financial policies (Fuller & Geide-Stevenson, n.p).

Jobless recovery

During the recession periods, an economy usually down surges in its GDP. However, to recover from this, most economies tend to put measures in place to help return the gross domestic product (GDP) to its normal state without necessarily creating any new jobs or even restoring jobs for the individuals who lost their work. This is what is normally termed as a jobless recovery. The 2000-2002 recessions brought about a downturn in the labor market. In essence, the labor market became much weaker despite viable steps taken to generate jobs and stimulate the entire economy. For example, after the recession had ended in fiscal 2001, the unemployment level significantly rose to 6.0% in 2002. During this period, the economy reached its peak yet jobless rolls expanded by almost 2.8 million (International Monetary Fund, pp.17).

After recovering from the 2008-2009 recessions, there are still doubts whether economies can adequately recover to re-attain full employment. For instance, in spite of the GDP recoveries, employment rates have increasingly lagged behind whereby between fiscal 2007 and October 2009, almost 8 million jobs were lost and have never been recovered in the US. The employed residents’ ratio reduced after the recovery to 58% in 2009 from the 63% recorded in 2007.

References

Knoop, Todd, A. Recessions and depressions: understanding business cycles. Santa Barbara, California: ABC-CLIO, 2010

International Monetary Fund (IMF). World economic outlook, October 2009: sustaining the recovery. Washington, DC: International Monetary Fund, 2009.

Fuller, D. and Geide-Stevenson, D. “Consensus among Economists: Revisited,” Journal of Economic Education 34, no. 4 (2003): 369–87.