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Updated July 31, 2020
Introduction to U.S. Economy: The Business Cycle and Growth
On June 8, 2020, the National Bureau of Economic
although this was not the case with the Coronavirus Disease
Research (NBER), an independent, nonprofit, research
2019 (COVID-19) pandemic. During an expansion, there
group, determined that economic activity in the U.S. peaked
may also be short periods of decreasing economic activity
in February 2020 and that the economy subsequently
interspersed within an expansionary period, and vice versa.
entered into a recession in the same month. On a quarterly
basis, economic activity peaked in the fourth quarter of
Dating the Business Cycles
2019. This In Focus discusses the business cycle, how
Business cycles are dated according to the peaks and
recessions are determined, and potential causes and effects
troughs of economic activity. A single business cycle is
of these fluctuations in the economy.
dated from peak to peak or trough to trough. NBER’s
Business Cycle Dating Committee is generally credited
What Is the Business Cycle?
with identifying business cycles in the United States.
Over time, economic activity tends to fluctuate between
periods of increasing economic activity, known as
NBER does not define a recession as two consecutive
economic expansions and periods of decreasing economic
quarters of declining real GDP, which is a popular metric
activity, known as recessions. Real gross domestic product
used by the media. Rather NBER uses a broader definition
(GDP)—total economic output adjusted for inflation—is
of a recession, as a period where there is a significant
the broadest measure of economic activity. The economy’s
decline in economic activity that spreads across the
movement through these alternating periods of growth and
economy. NBER uses a number of indicators to measure
contraction is known as the business cycle. The business
economic activity, including real GDP, economy-wide
cycle has four phases: the expansion, peak, contraction, and
employment, real sales, and industrial production.
trough, as shown in Figure 1.
Figure 2 presents real GDP from the first quarter of 1947
Figure 1. Stylized Depiction of the Business Cycle
through the second quarter of 2020, along with recessions,
as identified by NBER, represented with orange bars. Over
this period, real GDP grew at a 3.0% average annual rate.
Figure 2. Real GDP and Recessions
1947:Q1–2020:Q2
Source: Congressional Research Service.
As the economy moves through the business cycle, a
number of additional economic indicators tend to shift
alongside GDP. During an economic expansion, economy-
wide employment, incomes, industrial production, and sales
all tend to increase alongside the rising real GDP.
Additionally, over the course of an economic expansion, the
Source: U.S. Bureau of Economic Analysis (BEA).
rate of inflation tends to increase, although the 2009-2020
Note: Orange bars represent recessions as defined by NBER.
expansion showed that inflation can remain low while the
economy is growing. During a recession, the opposite tends
The economy tends to experience longer periods of
to occur. All of these indicators do not shift simultaneously,
expansion than contraction, especially since World War II
but they tend to shift around the same time.
(WWII). Between 1945 and 2019, the end of the most
recent business cycle, the average expansion has lasted
Although these fluctuations in economic activity are
about 65 months, and the average recession has lasted about
referred to as a “cycle,” the economy generally does not
11 months. Between the 1850’s and WWII, the average
exhibit a regular and smooth cycle as shown in Figure 1.
expansion lasted less than half as long (about 26 months),
Predicting recessions and expansions is notoriously difficult
and the average recession lasted about twice as long (about
due to the irregular pattern of the business cycle; a single
21 months). The 2009-2020 expansion was the longest on
quarter of economic data can be too short to predict a trend,
record, at 128 months.
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Introduction to U.S. Economy: The Business Cycle and Growth
The most recently completed recession in the United States,
Supply Shocks
the so-called Great Recession, began in December 2007 and
As part of a global economy, events outside of the United
ended in June 2009, a total of 18 months. Since the 1850’s,
States can often impact aggregate demand inside the United
in the United States, 12 other recessions have lasted as long
States, such as the 1979 oil shock that led to increased
as or longer than the Great Recession; however, all these
prices across the U.S. economy, resulting in a recession. In
recessions occurred before the Great Depression of the
some ways, the current recession is also an example of a
1930’s. It is too soon to tell if the current recession will
supply shock; the need for social distancing has halted
surpass the Great Recession in length, and due to the lag
commerce significantly and created challenges in supply
between when a recession begins or ends and when NBER
chains. Whereas demand for certain products has been high
announces it, this may not be known for some time.
and led to corrections in some supply chains (toilet paper,
cleaning products, etc.), demand for many products has
Marking the end of a recession does not necessarily mean
been low. Should aggregate demand increase, the economy
that the economy has returned to its pre-recession level of
may experience more unforeseen supply issues.
economic activity. For example, one important economic
metric, the unemployment rate, tends to continue to
Policy Options
increase following a recession as individuals return to the
Government policy, specifically monetary and fiscal policy,
labor force and begin searching for employment. Following
can impact aggregate demand either directly or indirectly.
the Great Recession, the economy did not return to what is
Congress, together with the President, is responsible for
considered “full employment” until the summer of 2015,
fiscal policy in the United States through changes in the
six years after NBER had declared the recession over.
level of government spending and tax revenue. Fiscal
policy can directly increase aggregate demand by
Short-Term Economic Growth
increasing government spending, reducing taxes, increasing
In the short term, the business cycle is primarily driven by
government transfers to individuals, or a combination of the
fluctuations in consumer spending and business investment.
three. During a recession, the government will typically
Over the business cycle, the rate at which the economy is
finance these policies by borrowing money, referred to as
expanding or contracting can be significantly different. For
deficit financing. The government has used fiscal stimulus
example, during the 2009-2020 expansion, real GDP grew
tools during the current crisis when, for example, it sent out
at an average pace of about 2.3% per year, whereas real
stimulus checks directly to consumers or when it
GDP shrank at an annual rate of 5.0% in the first quarter of
temporarily increased unemployment benefits.
2020 and 32.9% in the second quarter. Over longer periods
of time, the volatility of the business cycle fades to reveal a
Monetary policy can also be used to impact aggregate
pattern of growth in the economy.
demand. The Federal Reserve implements monetary policy
by changing short-term interest rates and the availability of
Potential Causes of the Business Cycle
credit in the economy. For example, lowering interest rates,
In general, the business cycle is governed by aggregate
which the Federal Reserve did in response to COVID-19,
demand (total spending) within the economy, but recessions
can encourage businesses to make new investments and
can also be caused by sudden shocks to supply, which will
individuals to buy new goods, as lower interest rates make
impact both aggregate supply and aggregate demand. The
it less expensive to borrow money.
current recession is unusual in that it displays elements of
both demand and supply shocks. This section discusses
Fiscal and monetary policy, when implemented
these types of shocks in more detail.
successfully, can help reduce economic volatility. However,
when unsuccessful, these policies may exacerbate the
Demand Shocks
fluctuations of the business cycle. The fiscal and monetary
Changes in consumer or business confidence can impact
policy options discussed in this section are countercyclical
aggregate demand. If individuals believe the economy will
policies, meaning that they work to counter the business
perform poorly in the future, individuals are likely to
cycle. For example, countercyclical fiscal policy might
increase how much they save to prepare for lean times
include increasing government spending during a recession
ahead. The associated decrease in spending would lower
and decreasing government spending during an expansion.
aggregate demand. Similarly, if businesses perceive that the
However, growth-oriented policies, when timed improperly,
economy is about to enter a recession, they are less likely to
can cause the economy to overheat (growing at an
make investments in new machinery or factories because
unsustainable rate) and subsequently cause a downturn.
consumers would not be able to afford their new products
during the recession.
Additional CRS Resources
CRS In Focus IF10408, Introduction to U.S. Economy:
The ongoing COVID-19 public health crisis has contributed
GDP and Economic Growth, by Mark P. Keightley.
to the current recession in this manner. Uncertainty
surrounding the virus and the state of the economy
(Note: This In Focus was originally authored by Jeffrey
combined with high unemployment levels has resulted in
Stupak, former CRS Analyst in Macroeconomic Policy.)
decreased consumption and increased saving (as a
percentage of income) on the part of consumers and
Lida R. Weinstock, Analyst in Macroeconomic Policy
decreased desire to increase capital investment on the part
of firms.
IF10411
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Introduction to U.S. Economy: The Business Cycle and Growth
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