Commentary 2 - Macroeconomics
This article discusses the length and pace of the current business expansion phase in the USA, and its possible effects on the subsequent recession. In the 2000’s, the expansionary phase of the business cycles lasted for an average of 73 months. If this trend is followed, the current recovery, which started in June 2009, will finish around July 2015.
All economies face fluctuations in their economic activity which is measured by changes in real GDP although this article measures it with the help of changes in employment. This continues as a cycle and is called the business cycle. The cycle contains phases of expansion (recovery and boom) and contraction (Recession and trough). A recession is defined as two consecutive quarters of falling GDP as seen in the diagram below. During a recession, the aggregate demand will decrease which would lead to lower rates of inflation or deflation. Since fewer goods and services are demanded and supplied within the economy, businesses will require fewer employees. This leads to a rise in unemployment. If less people are employed there will be less spending as fewer people can afford to spend. Thereafter, the economy will start recovering or expanding (trough) as employment and government spending increases. Also, since the demand for money is low, there will be lower interest rates thus aggregate demand will gradually increase resulting in a boom. This cycle will continue.
Diagram 1- The business cycle.
According to the article, the current recovery is moving very slowly, as is evidenced by the yearly employment growth rate in 2011 and 2012 of only 153,000 jobs per month. This is below the Fed’s estimate of the rate at which new jobs should be created to achieve full employment. In the recent past, the main economic tool used to recover from a recession has been through monetary policies such as reducing interest rates. Under the new Federal Reserve guidelines interest rates will...