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The Business Cycle and the 2016 Election

The 2016 election is now over, thankfully, and so it might be a good time to provide some perspective on the electoral outcome. It seems safe to say that voter dissatisfaction motivated much of what happened yesterday and the state of the economy is one part of this voter discontent. In this post, I thought I would provide some data on the business cycle history of the U.S. which I believe was clearly part of the explanation for the election. Along the way, I will give a primer if you will on business cycle measurement.

In a nutshell, the business cycle involves fluctuations in the amount of real output produced around a trend line. This trend provides the general direction of real output over time and is determined by the factors that determine economic growth. I have written previously about the importance of economic growth (two posts can be found here and here). But it is the behavior of output, and its associated incomes, in recent years that I think motivate voters. So it is instructive to look at the growth rates of output since the last three recessions to see the motivation of many voters. But first I need to define how the data must be used to tell us what we need to know.

Here is a graph of the business cycle typically used to teach students about the business cycle.


The picture contains the turning points that comprise business cycles. A trough is the point where output stops declining and a peak is where output stops growing. An expansion measures the time period from trough to peak and a recession is the time period from peak to trough.

Many writers have written in the media about the weak expansion since the last recession and it is this that I think provides a key insight into voter dissatisfaction. Reference dates for recessions are determined by the National Bureau of Economic Research (nber.org) and the real GDP data comes from the Bureau of Economic Analysis (bea.gov). So in the table below I provide the annualized growth rates of real output for the 24 quarters subsequent to the last three recessions. This data is quite revealing.

Recession Ending
Quarter No. March 1991 November 2001 June 2009
1 3.1 3.7 1.3
2 1.9 2.2 3.9
3 1.8 2.0 1.7
4 4.8 0.3 3.9
5 4.5 2.1 2.7
6 3.9 3.8 2.5
7 4.1 6.9 -1.5
8 0.8 4.8 2.9
9 2.4 2.3 0.8
10 2.0 3.0 4.6
11 5.4 3.7 2.7
12 4.0 3.5 1.9
13 5.6 4.3 0.5
14 2.4 2.1 0.1
15 4.6 3.4 2.8
16 1.4 2.3 0.8
17 1.4 4.9 3.1
18 3.5 1.2 4.0
19 2.9 0.4 -1.2
20 2.7 3.2 4.0
21 7.2 0.2 5.0
22 3.7 3.1 2.3
23 4.3 2.7 2.0
24 3.1 1.4 2.6
Mean 3.4 2.8 2.2

Notice how the average growth rates in real output have been declining since the recession that began in July 1990, ending in March 1991. What is clear (and admittedly a surprise to me) is that there has been a weakening of expansions that is not new. The middle column of the table shows a weaker expansion than the previous one with a further decline in the latest expansion. So as this table suggests, the performance of the economy has been declining for quite some time.

The poor record in the last two expansions provides some of the background to the last election. We need to do better than this if we want a better future for ourselves and our descendants.

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Economics One

A blog by John B. Taylor

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