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Business cycles.

Business Cycles(1)

While many readers of the popular press are familiar with such terms as "recession" and "expansion," few are likely to know that these downs and ups in the economy have been the subject of research at the NBER for nearly 70 years. Indeed, Wesley C. Mitchell, one of the Bureau's founders and its director of research for the first 25 years, had published a treatise on Business Cycles in 1913. When the NBER's certificate of incorporation was signed and recorded in 1920, business cycles had already been designated as the Bureau's second project, to follow the development of a series of national income accounts.

Business cycles are merely recurrent sequences of ups and downs in economic activity. These ups and downs are important because they represent major fluctuations in employment, production, real income, and real sales.

Shortly after the Bureau's founding, the NBER staff began to compile comprehensive chronological records of changes in economic conditions in the United States, England, France, Germany, Austria, and twelve other countries. These "business annals," as they were called, resulted in a 1926 volume with that title by Willard L. Thorp,(3) who is still a director emeritus on the NBER Board. (1)Much of the historical information in this article comes from S. Fabricant, Toward a Firmer Basis of Economic Policy: The Founding of the National Bureau of Economic Research, NBER pamphlet, 1984. (2)Director of Public Information, NBER. (3)W.L. Thorp, Business Annals, NBER General Series No. 8, 1926.

Also in the early 1920s, the NBER began collecting and analyzing time-series data on various aspects of modern economies. Narrowing the focus to the United States, England, France, and Germany, the NBER staff was able to compare these economic indicators to the trends described in the annals. Through a painstaking collective effort by a group of distinguished economists including Moses Abramovitz, Arthur F. Burns, Milton Friedman, Simon Kuznets, and Geoffrey H. Moore, the NBER finally compiled monthly, quarterly, and annual reference chronologies of business cycles. For the United States and Britain, these tables went back on a monthly basis to 1854.

In 1927, Mitchell published a volume on business cycles that established a workable definition and outlined a research program that was followed for many years thereafter.(4) In 1946, Burns and Mitchell rephrased the definition as follows: "Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansion occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals that merge into the expansion phase of the next cycle; this sequence of changes is recurrent but not periodic; in duration business cycles vary from more than one year to ten or twelve years; they are not divisible into shorter cycles of similar character with amplitudes approximately their own."(5)

This definition has been used for more than 60 years and is still used today. It is particularly noteworthy that the definition places no fixed requirement on the duration of expansions and contractions, their amplitude, or their scope. Nor did Mitchell define "aggregate economic activity," because there is no single comprehensive measure available for a long historical period--on a monthly or quarterly basis--that is comparable throughout in its coverage and adequate throughout in its statistical foundation.

In simple terms, one can visualize a business cycle by thinking of moving along a curve from a peak (or high point) through a trough (low point) and on to the next peak. Each peak marks the end of an expansion and the beginning of a contraction, or recession. Each trough marks the end of the contraction. The NBER's chronology of U.S. business cycles lists peaks and troughs in months and quarters back to 1854, and in annual terms back to 1790.

Historically, as now, determining when there was a turning point (peak or trough) in the economy was a two-step process. First, has there been a turning point? Here the NBER's historical series are useful for comparing current economic activity with earlier business cycles in terms of: duration, depth of the decline in aggregate activity, and diffusion among different economic activities and in different industries, sectors, and regions.

To identify the peak, for example, total business sales, the industrial production index, real GNP, the unemployment rate, nonagricultural employment, man-hours of nonfarm employment, and personal income must all be considered. Composite indexes of these series, and the components of each series, are also useful. As Moore points out, one of the advantages of basing the decision on such a wide variety of evidence "is that it reduces (4)W.C. Mitchell, Business Cycles: The Problem and Its Setting, NBER Studies in Business Cycles No. 1 and General Series No. 10, 1927. (5)A.F. Burns and W.C. Mitchell, Measuring Business Cycles, NBER Studies in Business Cycles No. 2, New York: Columbia University Press, 1946. the possibility of error and the need for subsequent revision."(6)

In 1961, the U.S. Department of Commerce began to include the NBER business cycle chronology in a monthly publication, now called the Business Conditions Digest. In that year, in a sense, the NBER became the official arbiter of the business cycle in the United States.

Since 1980, official business cycle turning points in the United States have been determined by the NBER's Business Cycle Dating Committee. Its current membership is: Chairman Robert E. Hall; NBER President Martin Feldstein; Geoffrey H. Moore, an NBER director and research associate emeritus; NBER Program Directors William H. Branson and Benjamin M. Friedman; and NBER Research Associates Victor Zarnowitz and Robert J. Gordon.

The committee last met in July 1983 when it identified November 1982 as the trough of the recession that began in July 1981. Following the lessons of the Bureau's founders, the Committee reviews a wide range of seasonally adjusted, revised data before making its decision. In a brief statement explaining the dating of the 1982 trough, the Committee referred to real GNP, real retail sales, total employment, nonfarm employment, real personal income, industrial production, and total unemployment as some of the factors that were influential.

The NBER continues to conduct research on business cycles. A complete listing of this work appears in A Decade of NBER Books, 1979-1988 or in NBER Publications, 1921-1988. Each is available free of charge by writing to: Publications Department, NBER, 1050 (6)G.H. Moore, Business Cycles, Inflation, and Forecasting, 2nd ed., NBER Studies in Business Cycles No. 24, Cambridge, MA: Ballinger Publishing Company, 1983. Massachusetts Avenue, Cambridge, MA 02138.
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Author:Zerwitz, Donna L.
Publication:NBER Reporter
Date:Mar 22, 1989
Next Article:Indexes of coincident and leading economic indicators.

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