Read about fluctuations in GDP from year to year.

Key points

  • A business cycle is the relatively short-term movement of the economy in and out of recession.
  • A significant decline in national output is called a recession; an especially lengthy and deep decline in output is called a depression.
  • The highest point of output before a recession begins is called the peak; the lowest point of output during the recession is called the trough.

Introduction

You might have heard a TV news reporter saying something along the lines of "the economy grew 1.2% in the first quarter". Reports like this are referring to percentage change in real GDP. By convention, GDP growth is reported at an annualized rate—whatever the calculated growth in real GDP was for a particular quarter is multiplied by four when it is reported, as if the economy were growing at that rate for a full year.

Tracking real GDP over time

The graph below shows the pattern of US real GDP since 1900. Notice that the generally upward longterm path of GDP has been regularly interrupted by short-term declines.
A significant decline in real GDP is called a recession. An especially lengthy and deep recession is called a depression. The severe drop in GDP that occurred during the Great Depression of the 1930s—which you probably learned about in history class—is clearly visible in the figure, as is the Great Recession of 2008 to 2009.
US GDP, 1900–2014
The graph illustrates that both real GDP and real GDP per capita have substantially increased since 1900.
Image credit: Figure 1 in "Tracking Real GDP over Time" by OpenStaxCollege, CC BY 4.0
Real GDP is important because it is highly correlated with other measures of economic activity, like employment and unemployment. When real GDP rises, so does employment.
The most significant human problem associated with recessions—and their larger, uglier cousins, depressions—is that a slowdown in production means that firms need to lay off or fire some of the workers they have. Losing a job imposes painful financial and personal costs on workers and often on their extended families as well. In addition, even those who keep their jobs are likely to find that wage raises are scanty at best—or they may even be asked to take pay cuts.
The highest point of the economy, before a recession begins, is called the peak; conversely, the lowest point of a recession, before a recovery begins, is called the trough. Thus, a recession lasts from peak to trough, and an economic upswing runs from trough to peak.
The movement of the economy from peak to trough and trough to peak is called the business cycle. It is intriguing to notice that the three longest trough-to-peak expansions of the 20th century have happened since 1960. The most recent recession started in December 2007 and ended formally in June 2009. This was the most severe recession since the Great Depression of the 1930s.
A private think tank, the National Bureau of Economic Research, or NBER, is the official tracker of business cycles for the US economy. However, the effects of a severe recession often linger on after the official ending date assigned by the NBER.
The table below lists the pattern of recessions and expansions in the US economy since 1900.
US business cycles since 1900
TroughPeakMonths of contractionMonths of expansion
December 1900September 19021821
August 1904May 19072333
June 1908January 19101319
January 1912January 19132412
December 1914August 19182344
March 1919January 1920710
July 1921May 19231822
July 1924October 19261427
November 1927August 19292321
March 1933May 19374350
June 1938February 19451380
October 1945November 1948837
October 1949July 19531145
May 1954August 19571039
April 1958April 1960824
February 1961December 196910106
November 1970November 19731136
March 1975January 19801658
July 1980July 1981612
November 1982July 19901692
March 2001November 20018120
December 2007June 20091873

Summary

  • A business cycle is the relatively short-term movement of the economy in and out of recession.
  • A significant decline in national output is called a recession; an especially lengthy and deep decline in output is called a depression.
  • The highest point of output before a recession begins is called the peak; the lowest point of output during the recession is called the trough.

Self-check questions

Return to the first graph in this article, but don't use the table. If a recession is defined as a significant decline in national output, can you identify any post-1960 recessions in addition to the recession of 2008–2009? Note: This requires a judgment call.
Two other major recessions are visible in the figure as slight dips: 1973 to 1975 and 1981 to 1982. Two other recessions appear in the figure as a flattening of the path of real GDP. These were in 1990 to 1991 and 2001.
According to the table above, how often have recessions occurred since the end of World War II—1945?
Eleven recessions in approximately 70 years averages about one recession every six years.
According to the table, how long has the average recession lasted since the end of World War II?
The table lists the months of contraction for each recession. Averaging these figures for the post-WWII recessions gives an average duration of 11 months, slightly less than a year.
According to the table, how long has the average expansion lasted since the end of World War II?
The table lists the months of expansion. Averaging these figures for the post-WWII expansions gives an average expansion of 60.5 months, more than five years.

Review question

What are the typical patterns of GDP for a high-income economy like the United States in the long run and the short run?

Critical thinking questions

  • Why do you suppose that US GDP is so much higher today than 50 or 100 years ago?
  • Why do you think that GDP does not grow at a steady rate, but rather speeds up and slows down?

Attribution

This article is a modified derivative of "Tracking Real GDP over Time" by OpenStaxCollege, CC BY 4.0.
The modified article is licensed under a CC BY-NC-SA 4.0 license.

References

The National Bureau of Economic Research. “Information on Recessions and Recoveries, the NBER Business Cycle Dating Committee, and related topics.” http://www.nber.org/cycles/main.html.