What does a business cycle recession look like?

[Maurice Bedard]

A recession is a normal component of a business cycle and is always followed by a period of economic growth. In fact, try as they might, central banks are really powerless to stop them. Their efforts may only serve to postpone the inevitable.

A business cycle recession is usually accompanied by a decline in consumer spending although this was not evident during the recession of 2001 to 2002. However, as it turned out, consumers were able to maintain their spending levels through mortgage equity withdrawals and by increasing their credit card debt. However, with the current recession, mortgage equity withdrawals are no longer possible because of the sharp decline in home market values. Thus, the graph for real GDP growth shows a significant drop when there is a recession.

On other hand, the graph for unemployment will be moving towards the opposite direction during a recession. It should be noted, however, that the increase in unemployment will no longer be as high as those experienced in the 1970s and 1980s because most of the manufacturing jobs have been transferred to other countries.

But how will the business cycle look right after the recession?

It has been the observation that a recession is usually followed by an improvement in the economy. However, there are indications that certain things have been altered during this recession.

First of all, it is predicted that consumers will no longer follow their previous ways before the recession of loading themselves with debt.

It has been noted that the debt-to-income ratio had more than doubled from 1982 to 2007. Many consumers have learned their lesson and this ratio is now on the downtrend. Many economists also predict that the market will remain volatile and there will still be a number of downturns even after the current recession has ended.

[Maurice Bedard]

What Does Business Cycle Mean?

The recurring and fluctuating levels of economic activity that an economy experiences over a long period of time. The five stages of the business cycle are growth (expansion), peak, recession (contraction), trough and recovery. At one time, business cycles were thought to be extremely regular, with predictable durations, but today they are widely believed to be irregular, varying in frequency, magnitude and duration.

Since the World War II, most business cycles have lasted three to five years from peak to peak. The average duration of an expansion is 44.8 months and the average duration of a recession is 11 months. As a comparison, the Great Depression - which saw a decline in economic activity from 1929 to 1933 - lasted 43 months.

Business Cycle
.html