This is the first of the questions Now Not too long ago (now that I've finished grading).
In a note to clients, Reed noted that America's contemporary economy is less susceptible to the boom-and-bust cycles of old – largely because its affluent consumers are more service-oriented and more reliant on factories or farms than in the past. Any time low. Consumer spending accounts for about 70% of the economy.
In a sense, if you look at the time series characteristics of real GDP, there is no doubt that the business cycle is not that obvious.
figure 1: Quarter-over-quarter annualized GDP growth rates for BEA (blue) and Ramey (tan), calculated as logarithmic differences. NBER-defined recession peak-to-trough dates appear gray. Source: Bank of East Asia, RemyNBER, and author's calculations.
Even the sample compiled by the Bank of East Asia shows the following general decline in GDP volatility.
figure 2: BEA's quarter-over-quarter annualized GDP growth (blue), calculated as a log difference. NBER-defined recession peak-to-trough dates appear gray. Source: BEA, NBER, and author's calculations.
Outside of pandemic-related recessions, gross domestic product has been much less volatile. The extension period determined by the NBER has also increased.This change has long been evident and prompted Bernanke coined the term “Great Moderation”.
This discussion reminds me of discussions at the turn of the century about how new information technologies could enhance inventory management (2001 Economic Report of the President):
New information technologies have also changed the nature of relationships between companies and their suppliers. Procurement practices are changing fundamentally as companies connect with suppliers through Internet-based business-to-business marketplaces. This capability enables businesses to streamline procurement activities, reduce transaction costs, improve management of supplier relationships, and even engage in collaborative product design. Driven by more efficient transportation networks, including ground and air infrastructure, “just-in-time” delivery helps companies reduce inventories and reduce costs while continuing to provide essential services to producers and consumers.
I don't have access to the same series, but here are the inventory-to-sales ratios for total business and retail, with the sample extending to the fourth quarter of 2023.
image 3: Inventory-to-sales ratio for total business (blue) and retail (tan). NBER-defined recession peak-to-trough dates appear gray. Source: FRED Census.
Inventory ratios continued to decline after 2000 until interrupted by the Great Recession in 2008. They began to rise again after the Tohoku earthquake in Japan, This highlights the dangers of distant supply chains.
What appears to be the case is that the relative contribution of changes in inventories to overall GDP growth has declined over time.
Figure 4: GDP month-on-month annualized growth rate (black line), contribution from final sales (cyan bar), and contribution from inventory changes (tan bar). NBER-defined recession peak-to-trough dates appear gray. Source: Bank of East Asia.
So, to some extent, the story we told in the macro introduction about imbalances in Keynesian crossovers being eliminated through inventory reduction or through accumulation of production changes is not as important as it once was. Whether this remains the case depends on the extent of reshoring or friendly reshoring as countries and businesses try to disrupt supply chains.
However, as the New York Times article points out, other shocks – demand and supply – remain, including the financial crisis (2007-09), the debt crisis (2009-12) or the pandemic (2020). To me, business cycles still exist, although certain propagation patterns may become less important.
