The Anatomy of Economic Fluctuations

The big booms and depressions in America have all involved major swings in real g.n.p., employment, and money income. The great de pressions, like the 1930’s, have meant massive unemployment, vast grey idle factories, financial disaster for millions, endless days of increasingly desperate job-hunting, hunger, and malnutrition. Most college students today cannot remember a great depression, for you have never seen one. Perhaps there will never be another, but we cannot be sure.4 The big booms have been the opposite— more jobs than workers, soaring wages and prices, big profits, speculation on the stock market, good times for eveiybody, but uncertainty about how long it will all last.

In the big booms and depressions, nearly everything goes up or down together. But underneath the surface, different parts of the economy expand and contract at different rates, and indeed in many fluctuations some sectors of the economy are actually contracting while others are expanding.

FIG. 9.2 The curve shows percentage deviations from the long.term upward trend of U.S. industrial production. Areas above the zero line are above trend, and similarly for readings below. (Source: Cleveland Trust Company.)

Figure 9-3 shows employment and three major components of real g.n.p. in the United States over the past 35 years. Their roughly synchronous behavior is obvious. It is equally obvious that production of durable goods fluctuates far more violently than nondurables, services, or employment. In fact, fluctuations in total production and employment occur largely in the capital-goods and durable consumer-goods industries—steel, electrical machinery, locomotives, automobiles, refrigerators. Fluctuations are much milder in shoes, clothing, foods, and other relatively nondurable consumer goods. And the stability of spending on services is remarkable; the growth curve hardly wobbles since the 19 30’s, in spite of repeated recessions. This does not mean that services and nondurable consumer-goods industries are unaffected by cyclical fluctuations, but the heart of the problem lies in the capital and durable consumer-goods industries.

If this were a more advanced text on economic fluctuations, we would need to look at hundreds of series rather than only a few major ones. The National Bureau of Economic Research, the leading private research organization on business cycles, has plotted hundreds of economic series and found that there is a wide spectrum of movements up and down. Some series normally lead the economy in both directions, some lag far behind, and others are spread out in between. Thus, orders for new machinery may turn down, the average work week in factories may be just flattening off, national income may be rising strongly, and the unemployment rate may be falling gradually, all at the same time as a recovery moves upward. Since hundreds of different components of total economic activity are important and since their movements vary so widely, the Bureau defines a recession as a period in which over half the important components are falling, and recovery when over half are rising. Most economists prefer to focus on a few big, critical measures, like real g.n.p., employment, industrial production, investment, and the like, but it is important never to forget the great complexity of movement in the real world.

Are There Business Cycles? Are there business cycles—regularly recurring booms and recessions? By now the answer should be clear. It is “no,” if you stress the “regularly.” Some upswings are long and strong, others short and weak. Some recessions are mild, others become massive depressions. But the answer is “yes,” if you mean only that there are intermittent periods of prosperity, followed by recessions. Given these facts, many economists have dropped the words “business cycles” in favor of the term “fluctuations,” which doesn’t connote such regularity. A few argue that there is no business cycle at all, only a series of responses to more-or-less random disturbances like wars, crop failures, and political changes.