Business cycles: Principal Features - Business in United States of America

Business cycles

Business cycles: A Different Cycle

Real Gross Domestic Product per Capita in the United States

Most industries and other economic sectors exhibit a fluctuating pattern of economic activity that generally conforms to the overall cyclical movement of the economy. An important exception is the agricultural sector. Agricultural production depends more on the weather and improvements in technology than on overall business conditions. The production of producer and consumer durable goods moves with a high degree of association with overall business conditions, and producer durable goods demonstrate wide cyclical movements in production, employment, and inventories. Fluctuations in production and employment are smaller for nondurable goods and services. One reason is that purchases of nondurable goods and services (items such as food, clothing, and medical care) are less readily postponed in difficult economic times than those of durable goods (such as automobiles). 

Private investment expenditures are much smaller in the aggregate than overall consumer spending. However, the level of investment is much more volatile than the level of consumption. Aggregate investment depends critically on business expectations, which can be highly variable over time; consumer expenditures are considerably more stable. The level of business profits varies closely with the overall business cycle and indicates a much greater amplitude of cyclical movements than the level of wages and salaries, dividends, net interest, or rental income. 

The level of wholesale prices tends to have wider fluctuations over the course of the business cycle than the levels of retail prices and wages. This is primarily because business-to-business sales (wholesale) are much more variable than sales from business to the consumer (retail). Virtually all recessions or depressions before 1950 were associated with declines in wholesale prices. Since 1950, wholesale prices have never fallen during an economic decline; however, in each of the nine U.S. recessions from 1953 through 2001, there was a temporary reduction in the rate of price increase. In contrast to prices for consumer and producer goods, however, prices of industrial commodities continued to show a high degree of sensitivity to business cycles, often declining even in periods of slow economic growth as well as during absolute declines in overall economic activity.

An increase in unemployment is a universal occurrence in recessions. As new business orders and output decline, workers are laid off. Wage stability prevents workers from easily finding new jobs at lower wage rates. Thus, during the declining phase of the business cycle, unemployment increases. When business revives, unemployment often declines slowly. This is because businesses want to be sure that the cyclical expansion will be sustained before they rehire workers or train new employees. Therefore, in 2002 and 2003, unemployment remained relatively high, even as the economy rebounded from the recession of 2001 and production surpassed prerecession levels.

During severe recessions, such as those in 1973- 1975 and 1981-1982, a significant portion of unemployment is characterized as long term. This refers to workers who have been unemployed for fourteen weeks or longer. Long-term unemployment poses a particular problem because the economic resources that families have available, primarily their personal savings and unemployment insurance, often are exhausted after several months.

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