Changes in the Business Cycle


Carl E. Walsh

FRBSF Economic Letter 1999-16 | May 14, 1999

In December 1998, the current expansion reached a milestone – it became the longest peacetime expansion in post-World War II U.S. economic history, surpassing the record previously held by the 1982-1990 expansion. In fact, if the expansion continues through January 2000, it will tie the expansion associated with the Vietnam War as the longest expansion since our records of such things start in 1854.

In December 1998, the current expansion reached a milestone – it became the longest peacetime expansion in post-World War II U.S. economic history, surpassing the record previously held by the 1982-1990 expansion. In fact, if the expansion continues through January 2000, it will tie the expansion associated with the Vietnam War as the longest expansion since our records of such things start in 1854.

The experience of the U.S. during the last twenty years has been quite remarkable. The long economic expansion of the 1980s was followed by a relatively short recession in 1990-91, and the economy has been expanding ever since. The U.S. has experienced only 8 months of recession in the last 16 years. The most visible sign of the continued expansion is provided by the unemployment rate. For the past year, it has remained below 4.5 percent, hovering at levels not seen since the early 1970s.

Not surprisingly, the long expansion has raised questions about the whole notion of the business cycle. Extended periods of expansion always lead a few commentators to speculate that the conventional business cycle is dead. In 1969, for example, a conference volume titled “Is the Business Cycle Obsolete?” was published just as the 1961-69 expansion came to an end and the economy entered a recession. With two record-setting expansions in a row, and the current one still going, it is to be expected that the notion of regular business cycles is again being questioned. The current favorite hypothesis is that a “new economy” has emerged in which our old understanding of business cycle forces is no longer relevant.

While few economists believe we have seen the end of business cycles (just look at Asia and Latin America!), the views of economists about business cycles have changed. These changes reflect real changes in the U.S. economy, changes in our ability to measure economic developments, and changes in economic theory.

Dating business cycles

Although virtually all data used to analyze the U.S. economy are produced by some agency of the federal government, the standard dates identifying business cycle peaks and troughs are determined by the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER). The NBER is a private, non-profit research organization whose research affiliates include many of the world’s most influential economists.

The NBER defines a recession as “a recurring period of 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.” Recessions are, therefore, macroeconomic in nature. A severe decline in an important industry or sector of the economy may involve great hardships for the workers and firms in that industry, but a recession is more than that. It is a period in which many sectors of the economy experience declines. Recessions are sometimes said to occur if total output declines for two consecutive quarters. However, this is not the formal definition used by the NBER.

Business cycle peaks and troughs cannot be identified immediately when they occur for two reasons. First, recessions and expansions are, by definition, recurring periods of either decline or growth. One quarter of declining GDP would not necessarily indicate that the economy had entered a recession, just as one quarter of positive growth need not signal that a recession had ended. The recession of 1981-82 provides a good example. Real GDP declined from the third quarter of 1981 to the fourth quarter, and then again from the fourth quarter to the first quarter of 1982. It then grew in the second quarter of 1982. The recession was not over, however, as GDP again declined in the third quarter of 1982. Only beginning with the fourth quarter did real output begin a sustained period of growth.

Second, the information that is needed to determine whether the economy has entered a recession or moved into an expansion phase is only available with a time lag. Delays in data collection and revisions in the preliminary estimates of economic activity mean the NBER must wait some time before a clear picture of the economy’s behavior is available. For example, it was not until December 1992 that the NBER announced that the trough ending the last recession had occurred in March 1991, a delay of 20 months.

Expansions and contractions since 1854

U.S. business cycle peaks and troughs going back to the trough in December 1854 have been dated by the NBER. Based on their dates, we can ask whether basic business cycle facts have changed over time.

One important aspect of a recession or an expansion is its duration. The lengths of recessions since 1854 are shown in Figure 1. Several interesting facts are apparent from the figure. First, measured solely by duration, the Great Depression of 1929-1933 pales in comparison with the 1873-1879 depression that lasted over five years. And the 1882-1885 recession lasted nearly as long as the Great Depression. Some lasting images of American history survive from this period, including the great debate over silver coinage.

Second, while the Great Depression was not the longest period of economic decline, it does appear to represent a watershed; no recession since has lasted even half as long as the 1929-1933 contraction.

Third, it is not just that recessions have been shorter on average in the post-World War II era, they have all been much shorter. Of the 19 recessions before the Great Depression, only three lasted less than a year; of the 11 recessions since the Great Depression, only three have lasted more than a year.

Figure 2 shows the duration of economic expansions since 1854. Darker bars mark wartime expansions. Based on duration, the changing nature of expansions is not quite as evident as for contractions. But of the 21 expansions prior to World War II, only three lasted more than three years. In contrast, of the 10 expansions since, only three have lasted less than three years. Even if the wartime expansions associated with Korea and Vietnam are ignored, post-World War II expansions have averaged 49 months, compared to an average of only 24 months for pre-World War II peacetime expansions.

Is the economy more stable?

A simple comparison of the duration of expansions and contractions does suggest the U.S. economy has performed better in the post-World War II era. Recessions are shorter, expansions are longer. These changes strongly suggest that business cycles have changed over time. However, a simple comparison of duration cannot tell us about the severity of recessions or the strength of expansions. This would be better measured by the decline in output that occurs in a recession or the growth that occurs in an expansion. However, most studies that examine how volatile economic activity has been do conclude that output has been somewhat more stable in the post-World War II era.

This conclusion, however, is not universally accepted. There are three reasons that comparing the business cycle over time is difficult.

First, the quality of economic data has improved tremendously over the past 100 years. If the earlier data on the U.S. economy contained more measurement error because the quality of our statistics was lower, the measured path of the economy may show some fluctuations that simply reflect random errors in output data. This will make the earlier period look more unstable. In addition, earlier data on economic output tended to provide only a partial coverage of the economy. For example, better statistics were available on industrial output than on services. Since services tend to fluctuate less over a business cycle, the earlier data undoubtedly exaggerated the extent of fluctuations in the aggregate economy.

Second, NBER dating methods have not remained consistent. Romer (1994) argues that the dating of pre-World War II business cycles was done in a manner that tended to date peaks earlier and troughs later than the post-World War II methods would have done. This contributes to the impression that prewar recessions were longer and expansions shorter.

Third, the economy is increasingly becoming a producer of services, and productivity in the service sector is often difficult to measure. In general, the tremendous changes experienced in recent years associated with the information revolution are likely to affect the cyclical behavior of the economy in ways not yet fully understood.

Implications for macroeconomic policy

Understanding changes in the nature of the business cycle is important for policymakers. Most central banks view contributing to a stable economy as one of their responsibilities. Promoting stable growth has important benefits, and reducing the frequency or severity of recessions is desirable as part of a policy to ensure employment opportunities for all workers. Preventing expansions from generating inflation is also important since once inflation gets started, high unemployment is usually necessary to bring it back down.

One might think, then, that policy designed to stabilize the economy should attempt to eliminate fluctuations entirely. This is not the case, for a very important reason. A business cycle represents fluctuations in the economy around full-employment output, but an economy’s full-employment output, often called potential GDP, can also change. It grows over time due to population growth, growth in the economy’s capital stock, and technological change. Developments in economic theory have led to a better understanding of how an economy adjusts to various disturbances. These adjustments can cause potential GDP to fluctuate, and it would be inappropriate for policy to attempt to offset these fluctuations. Identifying fluctuations in potential GDP from cyclical fluctuations can be difficult, however, as the current economic expansion illustrates. Is the economy in danger of overheating, risking a revival of inflation? Or have changes in the economy increased potential GDP?

While the U.S. economy has enjoyed two consecutive record expansions, a longer historical perspective does help to remind us that business cycles are unlikely to be gone for good. Despite talk of the “new economy,” all economies experience ups and downs that are reflected in swings in unemployment, capacity utilization, and overall economic output. Though changes in the structure of the economy may alter the extent of these fluctuations, they are unlikely to eliminate them.

In addition, the business cycle record is not independent of policy decisions. The economy may not have changed fundamentally; perhaps we have simply benefited from good economic policy (see Taylor 1998 for a discussion along these lines). With less successful policies, recessions could become more frequent and longer again. The Great Depression, for example, was prolonged by, among other things, poor economic and monetary policy decisions, and the recessions of the early 1980s were the price of policy mistakes in the 1970s that allowed inflation to rise significantly (Romer 1999). Thus, one reason business cycles can change, even if the underlying economy or source of disturbances haven’t, is because policymakers do a better (or worse) job of stabilizing the economy.

Carl E. Walsh
Professor of Economics, UC Santa Cruz,
and Visiting Scholar, FRBSF


Romer, Christina. 1999. “Changes in Business Cycles: Evidence and Explanations.” NBER Working Paper 6948.

_________. “Remeasuring Business Cycles.” Journal of Economic History 54, pp. 573-609.

Taylor, John B. 1998. “Monetary Policy and the Long Boom.” Federal Reserve Bank of St. Louis Review (November/December).

Opinions expressed in FRBSF Economic Letter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco or of the Board of Governors of the Federal Reserve System. This publication is edited by Anita Todd and Karen Barnes. Permission to reprint portions of articles or whole articles must be obtained in writing. Please send editorial comments and requests for reprint permission to