What is a Business Cycle?
Business cycles - alternating periods of recession and recovery - are part and parcel of all free-market economies.
- Business cycles are a type of fluctuation in aggregate economic activity in market-oriented economies.
- They consist of simultaneous expansions in many economic activities, followed by similarly general recessions.
- This sequence of changes is recurrent but not periodic –a business cycle can last from a year to more than a decade.
- A business cycle cannot be divided into shorter cycles of similar character and magnitude.
Growth rate cycles – alternating periods of accelerating and decelerating economic growth – occur within business cycles. Growth rate cycle downturns can culminate in either recessions or soft landings that are followed by a reacceleration in economic growth. These cycles are especially relevant to cyclical fluctuations in securities markets.
The Durability of the Cycle
During long periods of economic expansion, conviction inevitably grows that the business cycle is “obsolete,” because the economy has entered a “new era.” In the last century, this happened in the U.S. during the Roaring Twenties, the late 1960s, as well as the late 1990s. The recessions that followed dispelled such delusions - for a time.
As Japan and Europe recovered from the devastation of World War II in the decades that followed, growth was so rapid that recessions were few and far between, fostering the mistaken belief that U.S.-style recessions could not occur in those economies. As growth slowed, old-fashioned recessions reappeared, with Japan experiencing five and Germany three recessions since the early 1990s.
Similarly, many thought that the recent global recession and recovery broke the mold of past business cycles. However, through the prism of ECRI's leading indexes, the period resembled a textbook cycle. ECRI's indexes navigated this cycle just as well as they had in the “jungle-variety” depressions and crises of the early 20th century, and in the more recent “garden-variety” recessions.
The business cycle is not going away.
For this reason, the robustness and objectivity of ECRI's analytical framework is essential to any informed decision-making process. The reality is that, as long as we have free-market economies and human nature is prone to bouts of euphoria and depression, the business cycle will endure.