a cycle consists of expansion occurring at about the same time in many
economic activities, followed by similarly general recessions, or contrac-
tions, and revivals that merge into the expansion phase of the next cycle;
this sequence of changes is recurrent but not periodic; in duration busi-
ness cycles vary from more than one year to ten or twelve years and they
are not divisible into shorter cycles of similar character.^3
It is commonly assumed that a recession occurs when real gross do-
mestic product (GDP), the most inclusive measure of economic output,
declines for two consecutive quarters. But this is not necessarily so. Al-
though this criterion is a reasonable rule of thumb for indicating a reces-
sion, there is no single rule or measure used by the NBER. Rather the
bureau focuses on four different series to determine the turning points in
the economy: employment, industrial production, real personal income,
and real manufacturing and trade sales.
The Business Cycle Dating Committee of the National Bureau of
Economic Research confirms the business cycle dates. This committee
consists of academic economists who are associated with the bureau and
who meet to examine economic data whenever conditions warrant.
Over the entire period from 1802 through 2006, the United States has ex-
perienced 46 recessions, and these recessions have averaged nearly 19
months in length, while expansions have averaged 34 months.^4 This
means that, over these 205 years, almost slightly over one-third of the
time the economy has been in a recession. However, since World War II,
there have been 10 recessions, averaging 10 months in length, while the
expansions have averaged 66 months. So in the postwar period, the
economy has been in a recession less than one-seventh of the time, far
less than the prewar average.
The dating of the business cycle is of great importance. The desig-
nation that the economy is in a recession or an expansion has political as
well as economic implications. For example, when the bureau called the
onset of the 1990 recession in July rather than August, it raised quite a
few eyebrows in Washington. This was so because the Bush administra-
tion had told the public that the Iraqi invasion of Kuwait and the surge
in oil prices were responsible for the economic recession. This explana-
tion was undermined when the bureau actually dated the onset of the re-
210 PART 3 How the Economic Environment Impacts Stocks
(^3) Wesley C. Mitchell and Arthur Burns, “Measuring Business Cycles,” NBER Reporter, 1946, p. 3.
(^4) The data from 1802 through 1854 are taken from Wesley C. Mitchell, Business Cycles: The Problem
and Its Setting, Studies in Business Cycles No. 1, Cambridge, Mass.: National Bureau of Economic
Research (NBER), 1927, p. 444. The data on U.S. recessions are taken from the NBER’s Web site
(www.nber.org), which lists business cycles from 1854 onward.