ECON 202: Macroeconomics I Lecture 9 - Business Cycle Facts and Introduction John Grigsby February 2, 2017 Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 1 / 28
So far, we’ve been concerned with growth – long run trends 11.5 Log GDP per Capita (Chained 2009 USD) 11 10.5 10 9.5 9 8.5 Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 2 / 28
Now we will study fluctuations around trend What is a business cycle? Business Cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises. A cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions and revivals which merge into the expansion phase of the next cycle Burns and Mitchell (1946) Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 3 / 28
What do business cycles look like? P indicates peak, T shows trough. Taken from http://www.fperri.net/TEACHING/bocconi/20205/LEC10.pdf Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 4 / 28
We see this in GDP growth rates Real Gross Domestic Product 20 15 Percent Change from Preceding Period 10 5 0 -5 -10 -15 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: U.S. Bureau of Economic Analysis fred.stlouisfed.org myf.red/g/cxNC Long periods of positive growth followed by negative growth. Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 5 / 28
Observations regarding GDP cycle Real Gross Domestic Product 20 15 Percent Change from Preceding Period 10 5 0 -5 -10 -15 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: U.S. Bureau of Economic Analysis fred.stlouisfed.org myf.red/g/cxNC 1 Cycles recurrent but not periodic 2 Less volatile today than pre-80s. 3 Cycle length varies from 1.5 years to ≈ 20 years Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 6 / 28
Some key definitions (1) Definition: Recession A recession is defined as a period with 2+ consecutive quarters of negative growth in output (Okun). NBER defines recussion to be recurring period of substantial decline in output, income, employment, and trade across a variety of sectors. See http://www.nber.org/cycles/main.html for more. Definition: Cyclicality A variable is said to be Pro-Cyclical, Counter-Cyclical , or A-cyclical if it moves together with , opposite to , or independently of GDP, respectively. Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 7 / 28
Some key definitions (2) Definition: Lags, Leads, and Coincidence A variable is said to be Lagging, Leading , or Coincident if it moves after , before , or at the same time as GDP, respectively. Definition: Durable Goods A good is durable if it is not meant for immediate consumption and may be consumed over time. Non-durable goods are the opposite. Durable examples: cars, household appliances; things that depreciate slowly Non-durable examples: Food, Gasoline; things that depreciate quickly Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 8 / 28
Quiz: what do you think is pro-, counter-, and a-cyclical? Direction Timing Consumption Pro-Cyclical Coincident Industrial Production Pro-Cyclical Coincident Business Fixed Investment Pro-Cyclical Coincident Residential Investment Pro-Cyclical Leading Inventories Pro-Cyclical Leading Government Spending Pro-Cyclical Varies Imports Pro-Cyclical Leading Exports Pro-Cyclical Lagging Net Exports Counter-Cyclical Leading Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 9 / 28
Quiz: what do you think is pro-, counter-, and a-cyclical? Direction Timing Consumption Pro-Cyclical Coincident Industrial Production Pro-Cyclical Coincident Business Fixed Investment Pro-Cyclical Coincident Residential Investment Pro-Cyclical Leading Inventories Pro-Cyclical Leading Government Spending Pro-Cyclical Varies Imports Pro-Cyclical Leading Exports Pro-Cyclical Lagging Net Exports Counter-Cyclical Leading Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 9 / 28
Quiz: what do you think is pro-, counter-, and a-cyclical? Direction Timing Consumption Pro-Cyclical Coincident Industrial Production Pro-Cyclical Coincident Business Fixed Investment Pro-Cyclical Coincident Residential Investment Pro-Cyclical Leading Inventories Pro-Cyclical Leading Government Spending Pro-Cyclical Varies Imports Pro-Cyclical Leading Exports Pro-Cyclical Lagging Net Exports Counter-Cyclical Leading Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 9 / 28
Quiz: what do you think is pro-, counter-, and a-cyclical? Direction Timing Consumption Pro-Cyclical Coincident Industrial Production Pro-Cyclical Coincident Business Fixed Investment Pro-Cyclical Coincident Residential Investment Pro-Cyclical Leading Inventories Pro-Cyclical Leading Government Spending Pro-Cyclical Varies Imports Pro-Cyclical Leading Exports Pro-Cyclical Lagging Net Exports Counter-Cyclical Leading Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 9 / 28
Quiz: what do you think is pro-, counter-, and a-cyclical? Direction Timing Consumption Pro-Cyclical Coincident Industrial Production Pro-Cyclical Coincident Business Fixed Investment Pro-Cyclical Coincident Residential Investment Pro-Cyclical Leading Inventories Pro-Cyclical Leading Government Spending Pro-Cyclical Varies Imports Pro-Cyclical Leading Exports Pro-Cyclical Lagging Net Exports Counter-Cyclical Leading Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 9 / 28
Round 2: Labor market, stock prices, inflation Direction Timing Employment Pro-Cyclical Coincident Unemployment Rate Counter-Cyclical Lagging Labor Productivity Pro-Cyclical Leading Real Wage Pro-Cyclical Varies Money growth Pro-Cyclical Leading Inflation Pro-Cyclical Lagging Stock prices Pro-Cyclical Leading Nominal Interest rates Pro-Cyclical Lagging Real interest rates Acyclical – Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 10 / 28
Round 2: Labor market, stock prices, inflation Direction Timing Employment Pro-Cyclical Coincident Unemployment Rate Counter-Cyclical Lagging Labor Productivity Pro-Cyclical Leading Real Wage Pro-Cyclical Varies Money growth Pro-Cyclical Leading Inflation Pro-Cyclical Lagging Stock prices Pro-Cyclical Leading Nominal Interest rates Pro-Cyclical Lagging Real interest rates Acyclical – Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 10 / 28
Round 2: Labor market, stock prices, inflation Direction Timing Employment Pro-Cyclical Coincident Unemployment Rate Counter-Cyclical Lagging Labor Productivity Pro-Cyclical Leading Real Wage Pro-Cyclical Varies Money growth Pro-Cyclical Leading Inflation Pro-Cyclical Lagging Stock prices Pro-Cyclical Leading Nominal Interest rates Pro-Cyclical Lagging Real interest rates Acyclical – Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 10 / 28
Round 2: Labor market, stock prices, inflation Direction Timing Employment Pro-Cyclical Coincident Unemployment Rate Counter-Cyclical Lagging Labor Productivity Pro-Cyclical Leading Real Wage Pro-Cyclical Varies Money growth Pro-Cyclical Leading Inflation Pro-Cyclical Lagging Stock prices Pro-Cyclical Leading Nominal Interest rates Pro-Cyclical Lagging Real interest rates Acyclical – Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 10 / 28
Round 2: Labor market, stock prices, inflation Direction Timing Employment Pro-Cyclical Coincident Unemployment Rate Counter-Cyclical Lagging Labor Productivity Pro-Cyclical Leading Real Wage Pro-Cyclical Varies Money growth Pro-Cyclical Leading Inflation Pro-Cyclical Lagging Stock prices Pro-Cyclical Leading Nominal Interest rates Pro-Cyclical Lagging Real interest rates Acyclical – Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 10 / 28
What is least cyclical? Non-Durable Consumption Growth 25.0 20.0 15.0 10.0 Percent Change 5.0 0.0 -5.0 -10.0 -15.0 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 Non-Durable Consumption not too volatile Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 11 / 28
Durable Consumption Much More Volatile 25.0 20.0 15.0 10.0 Percent Change 5.0 0.0 -5.0 -10.0 -15.0 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 12 / 28
And Residential Investment Even More Volatile 25.0 20.0 15.0 10.0 Percent Change 5.0 0.0 -5.0 -10.0 -15.0 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 Note that recessions are different: 2001 had small drop in residential investment, but 2008 had a huge drop. Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 13 / 28
While Non-Residential Investment Also Volatile 15.0 10.0 Percent Change 5.0 0.0 -5.0 -10.0 1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 Grigsby Lecture 9 - Business Cycle Facts February 2, 2017 14 / 28
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