Boom and Bust Cycle, What Causes It, and Its History
28 Booms and Busts Since 1929
In the boom cycle, growth is positive. If the gross domestic product 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 when even the grocery clerk is making money from the latest asset bubble.
The bust phase is like life in the Middle Ages. It was brutish, nasty, and mercifully short. It usually lasts only 18 months or less. GDP turns negative, the unemployment rate is 7 percent or higher, and the value of investments falls. If it lasts more than three months, it's a recession. It can be triggered by a stock market crash, followed by a bear market.
A stock market crash can cause a recession. As stock prices fall, everyone loses confidence in the state of the economy. When investors don’t feel confident about the future outlook, they pull out their investments. They cut back business activities such as purchasing, hiring, and investing.
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 to 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.
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 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.
The bust cycle eventually stops on its own. That happens when prices are so low that those investors that still have cash start buying again. This can take a long time, and even lead to a depression. Confidence can be restored more quickly with central bank monetary policy and government fiscal policy.
The National Bureau of Economic Research 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 1929, there have been 28 cycles. On average, the booms last 38.7 months and the busts last 17.5 months. Data on the NBER cycles date as far back as 1857.
U.S. Boom and Bust Cycles Since 1929
|Bust||Aug 1929 - Mar 1933||Stock market crash, higher taxes, Dust Bowl.|
|Boom||Apr 1933 - Apr 1937||FDR passed New Deal.|
|Bust||May 1937 - Jun 1938||FDR tried to balance budget.|
|Boom||Jul 1938 - Jan 1945||World War II mobilization.|
|Bust||Feb 1945 - Oct 1945||Peacetime demobilization.|
|Boom||Nov 1945 - Oct 1948||Employment Act. Marshall Plan.|
|Bust||Nov 1948 - Oct 1949||Postwar adjustment|
|Boom||Nov 1949 - Jun 1953||Korean War mobilization.|
|Bust||Jul 1953 - May 1954||Peacetime demoblization.|
|Boom||Jun 1954 - Jul 1957||Fed reduced rate to 1.0%.|
|Bust||Aug 1957 - Apr 1958||Fed raised rate to 3.0%.|
|Boom||May 1958 - Mar 1960||Fed lowered rate to 0.63%.|
|Bust||Apr 1960 - Feb 1961||Fed raised rate to 4.0%.|
|Boom||Mar 1961 - Nov 1969||JFK stimulus spending. Fed lowered rate to 1.17%.|
|Bust||Dec 1969 - Nov 1970||Fed raised rate to 9.19%.|
|Boom||Dec 1970 - Oct 1973||Fed lowered rate to 3.5%.|
|Bust||Nov 1973 - Mar 1975||Nixon added wage-price controls. Ended gold standard. OPEC oil embargo. Stagflation.|
|Boom||Apr 1975 - Dec 1979||Fed lowered rate to 4.75%|
|Bust||Jan 1980 - Jul 1980||Fed raised rate to 20% to end inflation.|
|Boom||Aug 1980 - Jun 1981||Fed lowered rates. For more, see Historical Fed Funds Rates.|
|Bust||Jul 1981 - Nov 1982||Resumption of 1980 recession.|
|Boom||Dec 1982 - Jun 1990||Reagan lowered tax rate and boosted defense budget.|
|Bust||Jul 1990 - Mar 1991||Caused by 1989 Savings and Loan Crisis.|
|Boom||Apr 1991 - Feb 2001||Ended with bubble in internet investments|
|Bust||Mar 2001 - Nov 2001||2001 Recession caused by stock market crash, high-interest rates|
|Boom||Dec 2001 - Nov 2007||Derivatives created housing bubble in 2006|
|Bust||Dec 2007 - Jun 2009||Subprime Mortgage Crisis, 2008 Financial Crisis, the Great Recession|
|Boom||Jul 2009 - Now||American Recovery and Reinvestment Act and quantitative easing|