Business Cycles

lecture 13

potential output

the level of output that occurs when all resources are fully employed

business cycle

short-term fluctuations in economic activity

• causes unemployment rate to rise and fall sharply

  • recessions don’t lsat long but have a lasting impact on people’s careers

output gap

the difference between actual and potential output, measured as a percentage of potential output

• negative output gap- the economy is producing less than it can

  • bust

  • idle resources- workers cant find jobs, storefronts are shuttered, etc

• positive output gap- the economy is producing more than its potential

  • boom

  • unsustainable intensity possible for short time only

stages of the business cycle

peak- a high point in economic activity

trough- a low point in economic activity

recession- a period of declining economic activity

• runs from peak to trough

expansion - a period of increasing economic activity

• runs from trough to peak

• expansions keep going until they’re killed by an adverse shock

common characteristics of business cycles

recessions- short and sharp

expansions- long and gradual

business cycles are persistent

• impact many parts of the economy

unusual expansion

rapid bounce back folling coronavirus shutdowns

recession triggers

• slowing productivity

• oil price hikes

• credit controls

• high interest rates

• banking crises

• overvaluation of technology stocks

• housing market meltdown

• financial crisis

• global pandemic

comovement

variables that move up and down together

• if one part of the economy is doing well, then the other parts of the economy are also doing well

economic indicators

many rise and fall together

• real gdp

• industrial production

• non farm payrolls

• retail sales

• new businesses

• housing construction

• automobile sales

• imports from overseas

• new investment projects, business profits

• workers real wages

• stock prices

• inflation and interest rates

  • goos and services industries rise and fall together, though goods are more sensitive to the business cycle

leading indicators

variables that tend to predict the future path of the economy

• ex) business confidence; consumer confidence; the stock market

lagging indicators

variables that tend to follow business cycle movements with a bit of a delay

• ex) unemployment

okun’s rule of thumb

for every percentage point that actual output is less than potential output, the unemployment rate will be around half a point higher

seasonally adjusted

data stripped of predictable seasonal patterns

annualized rates

data converted to the rate that would occur if the same rate had occured throughout the year

• real variables are adjusted for inflation

top ten economic indicators(1-5)

• read gdp is the broadest measure of economic activity

  • measures total size of economy

  • CAUTION: incomplete when first released

• real GDI acts as a useful cross-check on GDP

  • gross domestic income adds up total income

  • GDP and GDI should be equal, but often differ

    • early reports of GDI are often more reliable than GDP

• non farm payrolls tell you if the labor market is improving

  • tell you how many jobs are created each month by tracking the number of workers on businesses’ payrolls

• the unemployment rate is an indicator of excess capacity

  • share of the labor force that wants a job but can’t find one

• initial unemployment claims provide a timely indicator

  • how many people lost their jobs and applied for unemployment insurance during the previous week

top ten indicators (6-10)

• business confidence tells you what managers are planning

  • supply managements purchasing managers index

• consumer confidence tells you what consumers are thinking

  • asks regular people how optimistic they are about the economy

• the inflation rate tells you what’s happening with prices

  • consumer price index provides a sense of how much economy wide prices are growing

• the unemployment cost index tells you what’s happening with wages

  • how fast wages and benefits are rising

  • leading indicator of inflationary pressure

• the stock market tells you about future expected profits of businesses

  • CAREFUL- the stock market has predicted nine out of the last five recessions

economy watchers guide

• track many indicators

  • imperfect measures

• broad indicators beat narrow indicators

  • give more weight to indicators that account for a greater share of the economy

• seek just-in-time date and distinguish between leading and lagging indicators

  • timely indicators about current trends

• find the signal among the noise

  • averaging over the past few data points

  • look past volatile components

• adjust your outlook when data differ from expectations

  • whether its good or bad news depends on whether that indicator came in stronger or weaker than expected