Boom and Bust Cycle: Causes & History

10 Booms and Busts Since 1980

income inequality
During a boom cycle, everyone thinks they will get rich. Photo by James Devaney/WireImage

The boom and bust cycle is the alternating phases of economic growth and decline. It's how most people describe the business cycle or economic cycle.

In the boom cycle, growth is positive. If GDP growth remains in the healthy 2-3 percent range, it can stay in this phase for years.  It accompanies a bull market, rising housing prices, wage growth and low unemployment.

The boom phase doesn't end unless the economy is allowed to overheat.

That's when there's too much liquidity in the money supply, leading to inflation.  As prices rise, irrational exuberance takes hold of investors. The GDP growth rate grows above 4 percent for two or more quarters in a row. You know you're at the end of a boom phase when the media says the expansion will never end, and even the grocery clerk is making money from the latest asset bubble.

The bust phase is like life in the Middle Ages--brutish, nasty, and mercifully short. It usually only lasts 18 months or less. GDP turns negative, the unemployment rate is 7 percent or higher, and the value of investments fall. If it lasts more than three months, it's usually a recession. It can be triggered by a stock market crash, followed by a bear market. For more, see How a Stock Market Crash Can Cause a Recession.

Causes

Three forces combine to create the cycle of boom and bust. They are the law of supply and demand, the availability of capital, and future expectations.

Strong consumer demand drives the boom phase. Families are confident about the future, so they buy more now, knowing they'll get better jobs, higher home values, and rising stock prices later on. This demand means companies have boost supply, which they do by hiring new workers. Capital is easily available, so consumers and businesses alike can borrow at low rates.

 That stimulates more demand, creating a virtuous circle of prosperity.

However, if demand outstrips supply, the economy can overheat. Also, if there's too much money chasing too few goods, it causes inflation.  When this happens, investors and businesses try to outperform the market. They ignore the risk to achieve gain. 

Plummeting confidence causes the bust cycle. Investors and consumers get nervous when the stock market corrects or even a crashes. Investors sell stocks, and buy safe-haven investments that traditionally don't lose value, such as bonds, gold, and the U.S. dollar. As companies lay off workers, consumers lose their jobs and stop buying anything but necessities. That causes a downward spiral. For more, see Causes of Recession

The bust cycle eventually stops on its on. That happens when prices are so low that those investors that still have cash start buying again. However, this can take a long time, and even lead to a depression. Confidence can be restored more quickly by central bank monetary policy and government fiscal policy  For more, see What Causes the Boom and Bust Cycle?

History

The National Bureau of Economic Research (NBER) provides the history of boom and bust cycles.

 It uses economic indicators to measure the boom and bust cycles. These include GDP statistics, employment, real personal income, industrial production and retail sales

Since 1854, there have been 33 cycles. On average, the booms last 38.7 months and the busts last 17.5 months. For more, see NBER Cycles

U.S. Boom and Bust Cycles Since 1929

Cycle   Duration                     Comments
BustAug 1929 - Mar 1933Stock market crash, higher taxes, Dust Bowl.
BoomApr 1933 - Apr 1937FDR passed New Deal.
BustMay 1937 - Jun 1938FDR tried to balance budget.
BoomJul 1938 - Jan 1945World War II mobilization.
BustFeb 1945 - Oct 1945Peacetime demobilization.
BoomNov 1945 - Oct 1948Employment Act. Marshall Plan.
BustNov 1948 - Oct 1949Postwar adjustment
BoomNov 1949 - Jun 1953Korean War mobilization.
BustJul 1953 - May 1954Peacetime demoblization.
BoomJun 1954 - Jul 1957Fed reduced rate to 1.0%.
BustAug 1957 - Apr 1958Fed raised rate to 3.0%.
BoomMay 1958 - Mar 1960Fed lowered rate to 0.63%.
BustApr 1960 - Feb 1961Fed raised rate to 4.0%.
BoomMar 1961 - Nov 1969JFK stimulus spending. Fed lowered rate to 1.17%.
BustDec 1969 - Nov 1970Fed raised rate to 9.19%.
BoomDec 1970 - Oct 1973Fed lowered rate to 3.5%.
BustNov 1973 - Mar 1975Nixon added wage-price controls. Ended gold standard. OPEC oil embargoStagflation.
BoomApr 1975 - Dec 1979Fed lowered rate to 4.75%
BustJan 1980 - Jul 1980Fed raised rate to 20% to end inflation.
BoomAug 1980 - Jun 1981Fed lowered rates. For more, see Historical Fed Funds Rates.
BustJul 1981 - Nov 1982Resumption of 1980 recession.
BoomDec 1982 - Jun 1990Reagan lowered tax rate and boosted defense budget.
BustJul 1990 - Mar 1991Caused by 1989 Savings and Loan Crisis.
BoomApr 1991 - Feb 2001Ended with bubble in internet investments
BustMar 2001 - Nov 20012001 Recession caused by stock market crash, high-interest rates
BoomDec 2001 - Nov 2007Derivatives created housing bubble in 2006
BustDec 2007 - Jun 2009Subprime Mortgage Crisis, 2008 Financial Crisis, the Great Recession
BoomJul 2009 - NowAmerican Recovery and Reinvestment Act and Quantitative Easing