The Business Cycle.

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Chapter 9 The Business Cycle

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I. Business cycles describe the fluctuations in business activity over time.
   A. Recession: commonly accepted definition is two consecutive quarters
        of negative growth in Real GDP.The (F)utility of GDP? argues that his
        is not a good definition.-The Becker-Posner Blog 12/17/09
   B. Why business activity fluctuates
       1. Inventory Recession: Excessive optimism causes inventories to over expand and
           eventually they must be worked down causing a recession. Computers have made
           easier to track inventory and made this type of recessions less likely.
       2. Rolling Recessions: Economic downturn is limited to areas or sectors of the economy.
           a. Economic activity eventually increases but by then other areas and sectors are in recession.
           b. International competition has increased the occurrence of this type of recession as sectors
               such as steel, autos, and recently computers have been affected.
       3. Innovation Cycle: railroads, computers, bio-technology
       4. Political Events: wars, international trade
       5. Misuse of Monetary and Fiscal Policy: government creates or borrows an incorrect
          amount of money. Note on the graph the1937 attempt to balance the budget!
       6. Non-cyclical Fluctuations
          a. Seasonal variation: Christmas buying rush, spring construction
          b. Long-Term Secular Trends: the expansion or contraction in the level of economic activity
             over a long period of years (the dark ages, the industrial revolution) For more visit
             1) Long Waves Theories of Development from the Kunter Krumme, U. of Washington.
             2) Call this a Recession, At Least It is Not the Drk Ages
                  By Bryan Ward-Perkins 12/22/09 FT.com
       7. Durable Goods have a long useful life (houses, equipment, etc.) Sale of durable goods
           contract substantially during a recession as their purchase may be easily postponed.
           For how other goods are affected visit U.S. Economic Cycles from Wikinvest.
    C. Current Conditions
         1. Current Business-Cycle Conditions from American Institute for Economic Research (AIER)
         2. Chance of a Double Dip Video from Business News Network 6/16/10
    D. A Brief History of U S Banking Problems will provide examples of what has
         caused the business cycle in the United States.

Q3 2011 GDP Second Estimate - 2.0% Submitted by Robert Oak on Tue, 11/22/2011 - 15:36 Q3 GDP 2011 was revised down a full half percent to 2.0%. from 2.5%. Here is the original BEA GDP report. The downward revision was due to inventories, offset by a surprise reduction in imports.

E. Leading, coincidental, and lagging indicators are measures such as the unemployment
rate which respectively change before, with or after general economic activity.
Economists use to predict future economic activity.

Interesting Links Leading Indicators
US Leading Economic Indicators and Realated Composite Indexes for April, 2008
Conference Board U.S. Business Cycle Indicators
Leading Economic Indicators 2007/01/leading-economic
Index of Leading Indicators – Premature to Rule out Recession
Asha G. Bangalore Northern Trust, May 19, 2008
http://tinyurl.com/4gma4w
LEI and KRWI - It's Different This Time? Paul KasrielNorthern Trust, April 21, 2007
RECESSION IMMINENT? BOTH THE LEI AND KRWI ARE FLASHING WARNING,
Paul L. Kasriel 3 22,07

See Understanding Contrary Indicators for more information.
Our Economics Learning Center has interesting materials..

    F. History
        1. Visit Business Cycle data since 1854 from the National Bureau of Economic Research.
        3. Boettke podcast on the Austrian Austrian Perspective on Business Cycles and Monetary Policy
        4. Great Depression by Robert J. Samuelson, the Concise Encyclopedia of Economics
           a. Amity Shales on the Great Depression, On EconTalk, Russ Roberts interviews Amity Shlaes,
               Bloomberg columnist and visiting senior fellow at the Council on Foreign Relations. She talks
               about her new book, The Forgotten Man: A New History of the Great Depression.
               The podcast discusses Herbert Hoover, Franklin Delano Roosevelt, the economics of the
               New Deal and the class warfare of the 1930s
            b. The Great Depression, On EconLog and in his column at TCS Daily, Arnold Kling also
                focuses on some of Shlaes's observations adding thoughtful insights.
        5. Recession of 2007
             a.. Slide Show: A Business Cycle Ends, and Many U.S. Workers Lose Ground
                  reviews the latest business expansion ending in early 2008. Business Week
              b.. On the Economy CNBC Video, April 10., 2008v
                 An overview of the economy with Joseph Stiglitz, a Nobel Prize-winning economist, and
                 Mohamed El-Erian, co-CEO of PIMCO
             c. Fed Watch: Turning Which Corner? 05/11/09 by Tim Duy
             d. Older Americans Made the Recession Look Better (Excerpts) April 2010,
                 by Marianna Kudlyak, Devin Reilly and Stephen Slivinski
                   of the Federal Reserve Bank of Richmond.

Top 10 Financial Crises

10. The Panic of 1907: The fourth so-called ”panic” in 34 years.
9. The Mexican Peso Crisis 1994 aka “The December Mistake” Punta !
8. Argentine economic crisis - 1999 If you have no money, is it a good idea to print more?
7. German hyperinflation - 1918-24 If you have to print a 1,000-billion Mark note, you probably have too much inflation.
6. Souk Al-Manakh - 1982 Try not to use post dated to buy stocks
5. Black Monday - 1987 Can we call a 23% drop in a single day a black swan?
4. Russian financial crisis - 1998 devaluation of the ruble and cancellation of debt is never good for a local stock market.
3. East Asian financial crisis - 1997 aka the Asian Contagion
2. Black Tuesday - 1929 — Really? One day, and not the entire Great Depression?
1. 1973 Oil Crisis — Big energy increases cause recessions

Top 10 Financial Crises | The Big Picture

Interesting Video
American-Experience Crash of 1929 Series
South Sea Bubble of 1720

       G. Recent data

For more read Domestic Income and Recession and
Recession Job Losses: 3 Views 9/9/0

The Panic of 1907
An Audio Summary from Get Abstract
Save Time-- Read Book Abstracts

         Capital Ideas Evolving        The Lexus and the Olive Tree

          Capitalism, Socialism, and Democracy      Applied Economics

H. Long-Term Secular Trends
The Dow Jones 1905- 2008 also followed a cycle. Oct. 11; 2008 WSJ

Will the US, like Japan, have two lost decades

Tuesday, August 2, 2011
John B. Taylor on Debating History and Policy with Reich and Krugman
mentions the Great Moderation.

Book Summary of American Dynasty
Aristocracy, Fortune, and the Politics of Deceit in the House of Bush

II. Three types of unemployment
     A. Frictional is caused by time lags in the operation of labor markets.
          1. Workers are between employment because they have been fired, are changing
              careers, are seasonal workers,
              have been temporarily laid off, etc.
          2. Short-term, inevitable, temporary, and is eliminated with time.
     B. Structural is caused by changes in consumer demand and technology.
         1. Result is an oversupply of workers with a particular skill.
         2. This unemployment is often concentrated in a particular area, associated with a
             particular industry, and is often permanent.
         3. Increased economic activity will not decrease this type of unemployment as training
             and/or relocation are required.
         4. Happened in the 1970's and early 1980's as consumers decided to buy small foreign
             built cars and other products produced in the Rust Belt. Now it is happening
             because NAFTA and foreign competition are causing industries to restructuring
              is needed because of foreign competition.
     C. Types of Unemployment&Natural Rate of Unemployment ACDC Economics and
          Types of Unemployment Inter Activity
     D. Cyclical
         1. Caused by a lack of total demand at the end of an economic expansion
         2. Temporary
         3. Recession of the early 1990's was due to a drop in demand caused by a
             debt buildup in the 1980's by individuals, businesses, and the federal
             government. Apprehension caused by high structural unemployment of both
             blue and white collar workers slowed the recovery.
         4. Recession of 2001 was caused by debt build up of individuals resulting from
             the long period of prosperity and the stock market bubble, excess capital
             investment caused by Y2K and internet optimism, and September 11.
         5. Great Recession of 2008-09 was caused by the end of an excessive building boom
             compounded by a banking crisis and stock market crisis.
         6. Broad Unemployment Across the U.S. Interactive map from the July 14, 2009 NYT.
           7. Unemployment: The Harder You Look, The Uglier It Appears 09/02/09
            8. Long Term Unemployment Rate has almost doubled . 9/9/09
         9. Sticky Wages Hold Back Job Growth WSJ, 11/12/10

III. Other unemployment topics
       A. Natural unemployment (frictional + structural unemployment) is usually 4% to 6%
           of the labor force
       B. Full employment is when cyclical unemployment equals zero
       C. Okun's Law: a 1% increase in cyclical unemployment will cause a 2.5% annual drop in GNP.
           1. GNP change = 2.5 (unemployment rate change)
           2. If unemployment goes up 2% as it did in the 1990-91 recession then the drop in GNP
               would be 2.5 X 2% or 5%.
           3. Cost to a 6 trillion dollar economy of 250 million people
               (5% X $6,000,000,000,000) / 250,000,000 = $1200/person/year.
      D. Labor Force Participation Rate from The Big Picture blog.
      E. Noneconomic costs of unemployment include loss of skills, self-esteem, and social-political unrest.
      F. Discouraged workers leaving the workforce lowers unemployment.
           first 2 charts courtesy of Gluskin Shef
      G. Q&A: Unemployment Extension WSJ, 11/18/10
        H. Gallup has Highrt Uunemployment and Underemployment than the government. 04/01/11 Editors Note: updated 10/7/11
I saw projections today that extended recent job growth and projected a full recovery of lost jobs by 2017. That would be three years longer than the average recovery period for a balance sheet, building cycle, financial crisis like the one we are currently experiencing.

Through September of 2011 from Economic Populist

Economic Growth in Q2 Revised to 1.6% Rate

On August 27, 2010, in Economy, by Tim

The Commerce Department reported that the rate of economic growth in the U.S. during the second quarter was revised downward from the advance estimate of 2.4 percent provided last month to just 1.6 percent, equal to the rate seen in the third quarter of 2009 when the economy first began expanding again after more than a year of contraction.

The Last Big Recession 1980-01-01 6.3 1981-01-01 7.5 1982-01-01 8.6 1982-12-01 10.8 Peak 1983-01-01 10.4 1984-01-01 8.0 1985-01-01 7.3 1986-01-01 6.7 1987-01-01 6.6

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IV. Inflation
      A. An increase in prices is measured by a price index such as the consumer producer index, CPI and the Producer Price Index, PPI.
      B. The PPI measures the change in wholesale prices.
      C. The PPI is a leading indicator for CPI as wholesalers can usually pass price changes on to retailers who pass them to
           consumer.
           1. Recent increases in foreign competition made passing price increases on more difficult.
           2. The internet had the same kind of affect in the late 1990's.
      D. The inflation rate for a year when a basket of consumer goods increase from $400 to $420 would be calculated as follows.

      E. Recent inflation data provided by the Department of Labor

V. Causes of inflation
     A. Demand-pull inflation
         1. Increases in C + I + G + X_Nwill cause GDP to increase.
         2. As the economy nears full employment, the prosperity caused by high employment increases demand and put
             upward pressure on prices.
         3. When this happens, the economy is said to be overheated.
     B. Cost-push inflation
         1. As the economy approaches full employment factor resources become scarce allowing their owners to increase prices.
         2. Supply-side shocks can cause high resource prices even if demand for resources is low, i.e., OPEC's two oil
             embargoes of the 1970's

VI. Economic effect of inflation
      A. Both income and resource allocations are affected by inflation as the market tries to adjust to the loss in value
           caused by inflation.
          1. High gas prices in the 1970's caused a switch to small cars and many people bought wood stoves.
          2. Low gas prices in the 1990's made RV's less expensive to run.
      B. Debtors (homeowners, businesses, government) are helped by high inflation because they pay back with dollars
          worth less than those borrowed.
      C. Creditors are hurt by inflation as they are paid back in less valuable dollars. Those on a fixed income are also
           hurt by the cheaper dollars.
      D. Cost-of-Living Increases (COLA's) were instituted in the 1970's to negate the severe effects of that period's high inflation.
           For more information visit Cost of living from Wikipedia.
      E. Deflating GDP
          1. Inflation can be taken out of growth in GDP by expressing later year production at earlier year prices.
          2. In the following chart, letters Q, P and T are quantity, price per unit and total respectively.

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1980

1990

1990 Production
at 1980 Prices

From From Inflationdata.com

Production

Q

P

T

Q

P

T

1990 Q

1980 P

T

Shirts

1

10

10

2

20

40

2

10

20

Movies

2

3

6

3

5

15

3

3

9

GDP

16

55

29

Note : Output more than tripled in "nominal" terms but in real terms output increased by 81.25% (29-16)/16

VII. Some question government procedures when calculating inflation and economic growth.
         A. Shadow Government Statistics
        B. Grossly Distorted Procedures explains how Hedonics is a way of accounting for the changing quality of products when calculating price movements.
            For example, today's computers are 2 to 3 times faster and have more memory than models produced just a few years ago.
            If someone can buy a better computer today than last year for the same price, have not prices really fallen? Here is another example.
            Is it realistic to compare the price of a 1955 Chevy with the price of a 2005 Toyota with air conditioning, DVD player, anti-lock breaks,
          seat belts, air bags, side air bags, power steering, power brakes, etc etc etc?. For a mathematical approach read Price Hedonics: A Critical Review.
          and A Note on the Impact of Hedonics and Computers on Real GDP.
       C. Financial Sense Online - The Core Rate
       D. Monthly Labor Review counters the Shadow Government Statistics arguments concerning inflation calculations

VIII. Presidents and the business Cycle
   IX. Only the Weak Survive import/export imbalances and the business cycle Nouriel Roubini, Project Syndicate (hat tip Mark Thoma) 10/15/10
     X. How the Government Dealt With Past Recessions

Interesting Articles
Turning Which Corner? 05/11/09 -Tim Duy's Fed Watch

The Age of Balance Sheet Recessions: What Post-2008 U.S., Europe and China Can Learn from Japan 1990-2005

The Paradox of Thrift

Two Important Timelines and Two Interesting Graphs

America's Great Depression Timeline

Timeline of the Great Depression

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	1980			1990			1990 Production at 1980 Prices			From From Inflationdata.com
Production	Q	P	T	Q	P	T	1990 Q	1980 P	T
Shirts	1	10	10	2	20	40	2	10	20
Movies	2	3	6	3	5	15	3	3	9
GDP			16			55			29
Note : Output more than tripled in "nominal" terms but in real terms output increased by 81.25% (29-16)/16
VII. Some question government procedures when calculating inflation and economic growth. A. Shadow Government Statistics B. Grossly Distorted Procedures explains how Hedonics is a way of accounting for the changing quality of products when calculating price movements. For example, today's computers are 2 to 3 times faster and have more memory than models produced just a few years ago. If someone can buy a better computer today than last year for the same price, have not prices really fallen? Here is another example. Is it realistic to compare the price of a 1955 Chevy with the price of a 2005 Toyota with air conditioning, DVD player, anti-lock breaks, seat belts, air bags, side air bags, power steering, power brakes, etc etc etc?. For a mathematical approach read Price Hedonics: A Critical Review. and A Note on the Impact of Hedonics and Computers on Real GDP. C. Financial Sense Online - The Core Rate D. Monthly Labor Review counters the Shadow Government Statistics arguments concerning inflation calculations VIII. Presidents and the business Cycle IX. Only the Weak Survive import/export imbalances and the business cycle Nouriel Roubini, Project Syndicate (hat tip Mark Thoma) 10/15/10 X. How the Government Dealt With Past Recessions
Interesting Articles Turning Which Corner? 05/11/09 -Tim Duy's Fed Watch The Age of Balance Sheet Recessions: What Post-2008 U.S., Europe and China Can Learn from Japan 1990-2005 The Paradox of Thrift

Two Important Timelines and Two Interesting Graphs America's Great Depression Timeline Timeline of the Great Depression	Please Visit Our Sponsors Free Internet Librariesimprove grades and Careers. Free Business Book Summaries 3 New York Times Bestsellers Support this site by shopping at amazon.com.

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