Introduction to U.S. Economy: The Business Cycle and Growth
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Updated January 3, 2023
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 trough 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 and
(GDP)—total economic output adjusted for inflation—is
persistent decline in economic activity that is spread across
the broadest measure of economic activity. The economy’s
the economy. NBER uses a number of indicators to
movement through these alternating periods of growth and
measure economic activity, including real GDP, economy-
contraction is known as the business cycle. The business
wide employment, real sales, and industrial production.
cycle has four phases: expansion, peak, contraction, and
trough, as shown in Figure 1.
The COVID-19 recession technically lasted just two
months. The most recently completed recession in the
Figure 1. Stylized Depiction of the Business Cycle
United States prior to the COVID-19 pandemic began in
December 2007 and ended in June 2009, a total of 18
months. Since the 1850s, in the United States, 12 other
recessions have lasted as long as or longer than the Great
Recession; however, all these recessions occurred before
the 1930s, when the Great Depression itself featured
recessions—one of which lasted 44 months.
Figure 2 presents real GDP from the first quarter of 1947
through the third quarter of 2022, along with recessions, as
identified by NBER, represented with orange bars. Over
this period, real GDP grew at a 3.1% average annual rate.
Source: Congressional Research Service.
Figure 2. Real GDP and Recessions
As the economy moves through the business cycle, a
1947:Q1-2022:Q3
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
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
to occur. All of these indicators do not shift simultaneously,
but they tend to shift around the same time.
Although these fluctuations in economic activity are
referred to as a “cycle,” the economy generally does not
exhibit a regular and smooth cycle as shown in Figure 1.
Source: U.S. Bureau of Economic Analysis.
Predicting recessions and expansions is notoriously difficult
Note: Gray bars represent recessions as defined by NBER.
due to the irregular pattern of the business cycle; a single
quarter of economic data can be too short to predict a trend,
although this was not the case with COVID-19. During an
https://crsreports.congress.gov
Introduction to U.S. Economy: The Business Cycle and Growth
The economy tends to experience longer periods of
decreased desire to increase capital investment on the part
expansion than contraction, especially since World War II.
of firms.
Between 1945 and 2019, the end of the most recent
business cycle, the average expansion has lasted about 65
Supply Shocks
months, and the average recession has lasted about 11
Events outside of the United States can often impact
months. Between the 1850s and World War II, the average
aggregate demand inside the United States, such as the
expansion lasted less than half as long (about 26 months),
1973 and 1979 oil shocks that led to increased prices across
and the average recession lasted about twice as long (about
the U.S. economy, resulting in two recessions. The U.S.
21 months). The 2009-2020 expansion was the longest on
economy has seen several supply shocks in the past few
record at 128 months.
years. In some ways, the COVID-19 recession was a supply
shock: The need for social distancing halted commerce
However, marking the end of a recession does not mean
significantly and created challenges in supply chains. The
that the economy has returned to its pre-recession level of
Russian invasion of Ukraine also created significant supply
economic activity; it takes time for the economy to recover
disruptions in several commodities markets in 2022,
from its low point. In addition, other economic conditions
although this did not result in recession in the United States.
can remain distressed. For example, following the Great
Recession, the economy did not return to what is considered
Policy Options
“full employment” until summer 2015, six years after the
Government policy, specifically monetary and fiscal policy,
end of the technical recession. On the other hand, the
can impact aggregate demand either directly or indirectly.
economy returned to full employment about two years after
Congress, together with the President, is responsible for
the COVID-19 recession, in line with the recovery of real
fiscal policy in the United States through changes in the
GDP.
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
COVID-19 recession was unusual in that it displays
Fiscal and monetary policy, when implemented
elements of both demand and supply shocks. This section
successfully, can help reduce economic volatility. When
discusses 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 Macroeconomic Policy
https://crsreports.congress.gov
Introduction to U.S. Economy: The Business Cycle and Growth
IF10411
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF10411 · VERSION 12 · UPDATED
Updated January 3, 2023
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 trough 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 and
(GDP)—total economic output adjusted for inflation—is
persistent decline in economic activity that is spread across
the broadest measure of economic activity. The economy’s
the economy. NBER uses a number of indicators to
movement through these alternating periods of growth and
measure economic activity, including real GDP, economy-
contraction is known as the business cycle. The business
wide employment, real sales, and industrial production.
cycle has four phases: expansion, peak, contraction, and
trough, as shown in Figure 1.
The COVID-19 recession technically lasted just two
months. The most recently completed recession in the
Figure 1. Stylized Depiction of the Business Cycle
United States prior to the COVID-19 pandemic began in
December 2007 and ended in June 2009, a total of 18
months. Since the 1850s, in the United States, 12 other
recessions have lasted as long as or longer than the Great
Recession; however, all these recessions occurred before
the 1930s, when the Great Depression itself featured
recessions—one of which lasted 44 months.
Figure 2 presents real GDP from the first quarter of 1947
through the third quarter of 2022, along with recessions, as
identified by NBER, represented with orange bars. Over
this period, real GDP grew at a 3.1% average annual rate.
Source: Congressional Research Service.
Figure 2. Real GDP and Recessions
As the economy moves through the business cycle, a
1947:Q1-2022:Q3
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
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
to occur. All of these indicators do not shift simultaneously,
but they tend to shift around the same time.
Although these fluctuations in economic activity are
referred to as a “cycle,” the economy generally does not
exhibit a regular and smooth cycle as shown in Figure 1.
Source: U.S. Bureau of Economic Analysis.
Predicting recessions and expansions is notoriously difficult
Note: Gray bars represent recessions as defined by NBER.
due to the irregular pattern of the business cycle; a single
quarter of economic data can be too short to predict a trend,
although this was not the case with COVID-19. During an
https://crsreports.congress.gov
Introduction to U.S. Economy: The Business Cycle and Growth
The economy tends to experience longer periods of
decreased desire to increase capital investment on the part
expansion than contraction, especially since World War II.
of firms.
Between 1945 and 2019, the end of the most recent
business cycle, the average expansion has lasted about 65
Supply Shocks
months, and the average recession has lasted about 11
Events outside of the United States can often impact
months. Between the 1850s and World War II, the average
aggregate demand inside the United States, such as the
expansion lasted less than half as long (about 26 months),
1973 and 1979 oil shocks that led to increased prices across
and the average recession lasted about twice as long (about
the U.S. economy, resulting in two recessions. The U.S.
21 months). The 2009-2020 expansion was the longest on
economy has seen several supply shocks in the past few
record at 128 months.
years. In some ways, the COVID-19 recession was a supply
shock: The need for social distancing halted commerce
However, marking the end of a recession does not mean
significantly and created challenges in supply chains. The
that the economy has returned to its pre-recession level of
Russian invasion of Ukraine also created significant supply
economic activity; it takes time for the economy to recover
disruptions in several commodities markets in 2022,
from its low point. In addition, other economic conditions
although this did not result in recession in the United States.
can remain distressed. For example, following the Great
Recession, the economy did not return to what is considered
Policy Options
“full employment” until summer 2015, six years after the
Government policy, specifically monetary and fiscal policy,
end of the technical recession. On the other hand, the
can impact aggregate demand either directly or indirectly.
economy returned to full employment about two years after
Congress, together with the President, is responsible for
the COVID-19 recession, in line with the recovery of real
fiscal policy in the United States through changes in the
GDP.
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
COVID-19 recession was unusual in that it displays
Fiscal and monetary policy, when implemented
elements of both demand and supply shocks. This section
successfully, can help reduce economic volatility. When
discusses 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 Macroeconomic Policy
https://crsreports.congress.gov
Introduction to U.S. Economy: The Business Cycle and Growth
IF10411
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF10411 · VERSION 12 · UPDATED