Academic journal article Economic Review - Federal Reserve Bank of Kansas City

The Longevity of Expansions

Academic journal article Economic Review - Federal Reserve Bank of Kansas City

The Longevity of Expansions

Article excerpt

As the current expansion nears its eighth anniversary, it becomes tempting to wonder whether the second-longest expansion in U.S. economic history is nearing an end. The only U.S expansion to last longer was a nearly nine-year expansion that occurred during the Vietnam War. Thus, the current expansion is heading into uncharted territory as the longest peacetime expansion in U.S. history. The length of the current expansion might be viewed by some analysts as worrisome.

The article examines whether there has been a systematic shift in the behavior and length of expansions in the post-World War II period. Understanding whether there has been such a shift may help policymakers, businesses, and consumers evaluate the upside and downside risks to the economic outlook. The article argues that the length of the current expansion does not signal a downside risk to the economy. When viewed in the context of all other postwar expansions, the length of the current expansion should not be seen as worrisome.

The article is divided into two sections. The first section examines whether there has been a shift in U.S. expansion lengths over time and shows the average length of expansions has increased dramatically since World War II. In addition, the section also shows that expansions after World War II have not shown a significant tendency to become more likely to end as they get older. The second section discusses several likely factors for this shift in the behavior of expansions and evaluates whether these factors continue to be applicable in the current expansion. In particular, the section discusses how the increased role of the government and structural shifts, such as shifts in the sources of income to more cyclically stable sectors, in the postwar U.S. economy may have led to an increase in the length of expansions.

I. ARE EXPANSIONS GETTING LONGER?

With the current expansion poised to become the longest peacetime expansion in U.S. history, and with two of the three longest expansions in U.S. history having occurred since 1980, it is natural to ask whether there has been a systematic shift in the length of expansions. In particular, one can investigate whether there has been an increase in the average length of expansions in the post-World War II period. A related issue that several researchers have examined has been whether there is any evidence that expansions are more likely to end as they get longer and whether this tendency has changed over time.'

This section provides a brief introduction to business cycles and uses the historical record of U. S. business cycles to examine these two issues.

What are business cycles?

Business cycles are a recurring pattern of expansion and recession in economic activity around a long-run growth path.2 The two phases of the business cycle, expansion and recession, are separated by turning points called peaks and troughs.3 The highest point reached by economic activity in each cycle is called the peak and the lowest point reached by economic activity is called the trough.

The official business cycle dates for the U.S. economy are determined by the National Bureau of Economic Research.4 Officially, the NBER defines a recession as "a recurring period of decline in total output, income, employment, and trade, usually lasting from six months to a year, and marked by widespread contractions in many sectors of the economy."5 The responsibility for dating business cycles belongs to the Business Cycle Dating Committee ofthe NBER. The Committee meets occasionally to determine if a period of expansion or recession has ended and to determine the date ofthe phase's conclusion.6

The Business Cycle Dating Committee begins by determining whether the economy is indeed in a new phase. If, for example, the Committee believes the economy may have entered a recession, they use the historical record of business cycles by comparing the current episode with past recessions and other past episodes that were not classified as recessions but had some characteristics of recessions. …

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