Business cycle

Economic indicators serve as vital tools for assessing the health of an economy and predicting future trends. Whether you are an investor, policymaker, or business owner, understanding these indicators can provide valuable insights into economic performance and potential shifts in the market. This article explores the relevance of economic indicators, their role in forecasting, and key indicators that every analyst should monitor.

After years of more or less continuous growth and relatively low macroeconomic volatility during the years named “The Great Moderation”¹, the US economy entered in December 2007² what seems to have been the deepest recession since The Great Depression3 The recession has been of relatively long duration and contained both a credit-crunch and a significant downturn in the housing market.

The probability for corporate success varies together with the business cycle, and there is no doubt that the state of the macro economy influences the rate of investor and corporate success. This means that the potential risks of changes in business cycle growth rate is a potential threat to all market participants, which needs to be handled through risk management.

Even though the different business cycles can be described through relatively simple models such as the one explained in section ( U.S. business cycles ), the underlying reasons for the developments and the amplitude of the business cycles seems to be changing with each cycle. Wesley Clair Mitchell who was one of the early researchers of business cycles and leaders of NBER stated that; “since each business cycle in a sense is unique, a thoroughly adequate theory of business cycles, applicable to all cycles is unattainable” (Dua 2004, Page 1).

The vast studies of business cycles are invaluable to the possibilities of understanding the state of the macro economy and to be able to predict the future movements of the economy. Many of the most famous economists in history, such as Keynes and Schumpeter have been researching this subject, but in this section I will mainly use the research by The National Bureau of Economic Research (NBER) as their research is widely accepted among economists in the U.S. today.

It has frequently been observed that interest in business or trade cycle theory is itself cyclical (e.g. Zarnowitz 1985, p.524). In periods of sustained prosperity interest wanes, as it did in the 1960s and early 1970s when research into macroeconomic dynamics concentrated on growth theory. At the end of the 1960s, the continued existence of business cycles was questioned. The experiences of the 1970s and early 1980s, especially following the 1973 and 1979 oil price shocks, brought a resurgence of interest in business cycles.