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Updated January 13, 2022
Introduction to U.S. Economy: The Business Cycle and Growth
On July 19, 2021, the National Bureau of Economic
expansion, there may also be short periods of decreasing
Research (NBER), an independent, nonprofit research
economic activity interspersed within an expansionary
group, announced that economic activity in the United
period, and vice versa.
States reached a post-COVID-19 pandemic onset low in
April 2020 and subsequently exited a two-month recession.
Dating the Business Cycles
Economic activity did not recover to its pre-pandemic level
Business cycles are dated according to the peaks and
until mid-2021. This In Focus discusses the business cycle,
troughs of economic activity. A single business cycle is
how recessions are determined, and potential causes and
dated from peak to peak or trough to trough. NBER’s
effects of these fluctuations in the economy.
Business Cycle Dating Committee is generally credited
with identifying business cycles in the United States.
What Is the Business Cycle?
Over time, economic activity tends to fluctuate between
NBER does not define recession as two consecutive
periods of increasing economic activity, known as
quarters of declining real GDP, which is a popular metric
economic expansions, and periods of decreasing economic
used by the media. Rather NBER uses a broader definition
activity, known as recessions. Real gross domestic product
of recession as a period where there is a significant decline
(GDP)—total economic output adjusted for inflation—is
in economic activity that spreads across the economy.
the broadest measure of economic activity. The economy’s
NBER uses a number of indicators to measure economic
movement through these alternating periods of growth and
activity, including real GDP, economy-wide employment,
contraction is known as the business cycle. The business
real sales, and industrial production.
cycle has four phases: expansion, peak, contraction, and
trough, as shown in Figure 1.
Figure 2 presents real GDP from the first quarter of 1947
through the third quarter of 2021, along with recessions, as
Figure 1. Stylized Depiction of the Business Cycle
identified by NBER, represented with orange bars. Over
this period, real GDP grew at a 3.1% average annual rate.
Figure 2. Real GDP and Recessions
1947:Q1-2021:Q3
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.
Source: U.S. Bureau of Economic Analysis.
Additionally, over the course of an economic expansion, the
Note: Orange bars represent recessions as defined by NBER.
rate of inflation tends to increase, although the 2009-2020
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.
Between 1945 and 2019, the end of the most recent
business cycle, the average expansion has lasted about 65
Although these fluctuations in economic activity are
months, and the average recession has lasted about 11
referred to as a “cycle,” the economy generally does not
months. Between the 1850s and World War II, 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.
although this was not the case with COVID-19. During an
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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
prior to the COVID-19 pandemic, the so-called Great
Events outside of the United States can often impact
Recession, began in December 2007 and ended in June
aggregate demand inside the United States, such as the
2009, a total of 18 months. Since the 1850s, in the United
1979 oil shock that led to increased prices across the U.S.
States, 12 other recessions have lasted as long as or longer
economy, resulting in a recession. In some ways, the
than the Great Recession; however, all these recessions
current recession is also an example of a supply shock: The
occurred before the Great Depression of the 1930s. The
need for social distancing has halted commerce
COVID-19 recession technically lasted just two months.
significantly and created challenges in supply chains.
However, marking the end of a recession does not mean
Whereas demand for certain products has been high and led
that the economy has returned to its pre-recession level of
to corrections in some supply chains (e.g., toilet paper,
economic activity; it takes time for the economy to recover
cleaning products), demand for many products has been
from its low point.
low. Should aggregate demand increase, the economy may
experience more unforeseen supply issues.
In addition, other economic conditions can remain
distressed. For example, following the Great Recession, the
Policy Options
economy did not return to what is considered “full
Government policy, specifically monetary and fiscal policy,
employment” until summer 2015, six years after the end of
can impact aggregate demand either directly or indirectly.
the technical recession. Because the COVID-19 recession
Congress, together with the President, is responsible for
had an unusual cause and was large and sudden, the
fiscal policy in the United States through changes in the
economy is still experiencing disruptions.
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 typically finances
Over the business cycle, the rate at which the economy is
these policies by borrowing money, referred to as deficit
expanding or contracting can be significantly different. For
financing. The government has used fiscal stimulus tools
example, during the 2009-2020 expansion, real GDP grew
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 31.4% in the second quarter
temporarily increased unemployment benefits.
of 2020 before growing at an annual rate of 33.1% in the
third quarter. Over longer periods of time, the volatility of
Monetary policy can also be used to impact aggregate
the business cycle fades to reveal a pattern of growth in the
demand. The Federal Reserve implements monetary policy
economy.
by changing short-term interest rates and the availability of
credit in the economy. For example, lowering interest rates,
Potential Causes of the Business Cycle
which the Federal Reserve did in response to COVID-19,
In general, the business cycle is governed by aggregate
can encourage businesses to make new investments and
demand (total spending) within the economy, but recessions
individuals to buy new goods, as lower interest rates make
can also be caused by sudden shocks to supply, which will
it less expensive to borrow money.
impact both aggregate supply and aggregate demand. The
current recession is unusual in that it displays elements of
Fiscal and monetary policy, when implemented
both demand and supply shocks. This section discusses
successfully, can help reduce economic volatility. When
these types of shocks in more detail.
unsuccessful, these policies may exacerbate the fluctuations
of the business cycle. The fiscal and monetary policy
Demand Shocks
options discussed in this section are countercyclical
Changes in consumer or business confidence can impact
policies, meaning they work to counter the business cycle.
aggregate demand. If individuals believe the economy will
For example, countercyclical fiscal policy might include
perform poorly in the future, they are likely to increase how
increasing government spending during a recession and
much they save to prepare for lean times ahead. The
decreasing government spending during an expansion.
associated decrease in spending would lower aggregate
However, growth-oriented policies, when timed improperly,
demand. Similarly, if businesses perceive that the economy
can cause the economy to overheat (growing at an
is about to enter a recession, they are less likely to make
unsustainable rate) and subsequently cause a downturn.
investments in new machinery or factories because
consumers would not be able to afford their new products
CRS Resources
during the recession.
CRS In Focus IF10408, Introduction to U.S. Economy:
GDP and Economic Growth, by Mark P. Keightley and
The COVID-19 public health crisis contributed to the
Lida R. Weinstock
March-April 2020 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 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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