Joseph (Son of Jacob) and the Business Cycle

Business cycles are a part of every capitalistic economy. In fact, there is reference to a business cycle in the bible, as explained by Joseph, the son of Jacob. Joseph had the ability to interpret dreams into real life occurring prophesies. On one instance, Joseph interpreted the dream of the Pharaoh of Egypt. The Pharaoh “dreamt of seven lean cows which rose out of the river and devoured seven fat cows; and, of seven withered ears of grain which devoured seven fat ears.” Joseph interpreted that the dream meant there would be seven years of bad economic times (famines). In these hard times, the Egyptian and surrounding kingdoms would be in an economic slump. However, Joseph interpreted that after the seven years of hard time, seven years of prosperity (economic expansion) would arrive to all of the known lands. Both the good and bad economic times as described by Joseph show a pattern, and it is not a stretch to say that Joseph is actually describing a business cycle. Business cycles, as characterized by Joseph, show that there will be periods of economic gains and periods of economic sufferings.

Now to more recent times, when my mom was born in the 1930s the US economy was not doing very well. In fact, the economy was in a depression. Unemployment was high and the average family income was reduced by 40 percent. Moreover, when I was born in the 1970s, thankfully, the economy was not as bad as it was in my mom’s day. However, the decade of the 1970s one was of the worst economic decades in the history of America. As a matter of fact, inflation increased by 6 percent a year in the 1970s. This period of our economic past is known as the stagflation period because unemployment and inflation increased yearly. As of today, the American economy is better than it was in the 1930s or 1970s, but the economy is not doing as well as it has in good economic times. For instance, currently, personal disposable income has decreased. Yes, GDP has grown by 1.3 percent for the second quarter of 2011 but the current unemployment rate is 9.1 percent. These numbers are not great, but they at least show that economic growth is occurring.

As for recessions in general, the last recession in America began in December of 2007 and ended June of 2009. American recessions have a historically lasted from about six months to a few years, except for the Great Depression which lasted a total of 43 months. Recessions are countered by economic expansions, which typically last longer than recessions. To make a point, America throughout its history has been in more economic expansions than in recessions, with the longest expansionary period lasting for 120 consecutive months.

Business Cycles, Potential Business Profits, and Economic Comebacks

As the US recession comes to an end we will see expansion again, and as our middle class feels more comfortable spending money, they will. As the American consumer spends more money they will import more products and services from abroad. They will also buy more oil from the Middle East, and items from China. This means that the rest of the economies of the world will start hiking back up again. When the US economy is going strong at our GDP is over $17 trillion a year.

The entire world GDP is about $52 trillion a year, but it is almost off 10% due to the global economic crisis. The loss of $10 trillion in trade and GDP is causing nations around the world into near economic collapse. We are lucky to live in the United States and see that we have bottomed out on the recession and that our business cycle is going to be hiking back upwards. Currently, unemployment is still increasing and on the rise, but corporate profits are up and the stock market is starting to move skyward again.

As these corporations make more money they will have no choice but to expand their businesses to have the supply needed to service the demand. This is when everyone goes back to work. Economic comebacks are inevitable, business cycles are in constant flux, and potential business profits are on their way.

Anyone who counts the United States of America down and out is making a severe mistake and anyone that thinks that this recession will go on forever is absolutely and historically wrong. I hope you will please consider this and think about how you will expand your business as things quickly recover.

The Business Cycle and the Economy

Economic activity in the United States changes from year to year. The production of goods and services increases in one time frame while normal economic growth does not occur in another. Although these changes are irregular and unpredictable, most of the macroeconomic variables involved are interrelated and move together. This is particularly true about real output and unemployment. Fluctuations in real GDP and the unemployment rate are inversely related…as output drops, unemployment rises. These short-run changes in output and unemployment are known as the business cycle.

A business cycle is changes in output, income, and employment within the total economy. When businesses operate near capacity and real GDP (output) is rising, a peak occurs. As business slows, the economy contracts, sales drop, real GDP slows down, and unemployment increases. The business condition bottoms out at a trough where real GDP is dropping and unemployment is rising. When business conditions improve, an expansion phase occurs where sales increase, GDP grows quickly, and unemployment drops until economic growth reaches a peak again. Then the cycle starts over. Economic growth does not go on for an indefinite period because extended periods of growth, as well as short periods of concentrated growth, are eventually joined by higher rates of inflation. These higher prices spur policymakers to stimulate a downturn in hopes of reducing inflationary pressures by slowing economic growth.

Economic policy makers, the Federal Reserve Board with its monetary policies and the government with its fiscal policies, interpret and react to business cycles. They try to forecast just where the economy is going in the near future based on leading economic indicators. The ultimate goal is to sustain real GDP growth at a constant 3% non-inflationary rate, to keep the unemployment rate at the full-employment level of 5% to 6%, and to curtail inflation by keeping it at no more than 3%. In essence, policy makers try to level out the business cycle by diminishing the extent of differences in economic growth over the cycle. The explanation of how the Fed carries out monetary policy is the manner in which it responds to changes in output. The Fed can reduce output in the short-run by contracting the money supply. It can increase short-run output by increasing the money supply. The Federal Reserve can also increase or decrease interest rates to try and parallel aggregate demand growth with aggregate supply growth from year to year. For example: if the Fed decides that GDP is slowing down to a meaningfully lower growth rate, it may reduce interest rates to stimulate economic growth. Actions by the Fed definitely affect the quantity of output produced in the U.S. economy.

The Fed scrutinizes several economic variables that are indicators of economic growth and inflation. Monitoring changes in unemployment, the cost of labor, the use of productive capacity, the price of commodities, business inventories, and worker productivity allow the Fed to predict where the economy is headed. By monitoring the combined effect of economic indicators, the Fed is able to take action to either slow growth before inflation increases or expand growth if the economy has taken a downturn.