Economic growth is not a steady phenomenon; rather, it tends to exhibit a pattern as follows:
1. an expansion of above-average growth
2. a peak
3. a contraction of below-average growth
The troughs then are followed by periods of expansion and the cycle generally repeats, though not in a regular manner. These fluctuations in economic growth are known as the business cycle and are depicted conceptually in the following diagram:
The Business Cycle
Indicators of the Business Cycle
Because the business cycle is related to aggregate economic activity, a popular indicator of the business cycle in the U.S. is the Gross Domestic Product (GDP). The financial media generally considers two consecutive quarters of negative GDP growth to indicate a recession. Used as such, the GDP is a quick and simple indicator of economic contractions.
However, the National Bureau of Economic Research (NBER) weighs GDP relatively low as a primary business cycle indicator because GDP is subject to frequent revision and it is reported only on a quarterly basis (the business cycle is tracked on a monthly basis). The NBER relies primarily on indicators such as the following:
* personal income
* industrial production
Additionally, indicators such as manufacturing and trade sales are used as measures of economic activity.