A Review of the Latest Business Cycle
As we move into a new year—and as the current expansion comes, perhaps, to an end—it is an appropriate time to examine how the U.S. economy has evolved, so far anyway, over this business cycle.
Services continue to account for the largest share of gross domestic product (GDP). Through the third quarter of 2007, they comprised 40.4 percent of GDP—up very slightly from 40.0 percent in 2000. Both nondurable and durable goods also increased their shares of GDP. Durable goods rose from 8.8 to 10.7 percent and nondurable goods from 19.8 to 20.7 percent. Declining in share were both private residential investment (4.6 to 4.2 percent) and private nonresidential investment (12.6 to 11.8 percent).
A more significant change over this business cycle is the continuing rise in the importance of international trade to the U.S. economy. Going into the last recession, both exports and imports declined as a share of GDP, but throughout this expansion both have grown at a fairly steady pace, at least until lately. As the dollar has weakened against other currencies and economic growth overseas has become relatively stronger, exports’ share has begun to accelerate, while imports’ share has leveled off and even shrank in the third quarter.
There have also been large changes in the shares of the components of national income over this business cycle. Compensation of employees retains the largest share, but it has fallen from over 66 percent at the end of the last expansion to 64.3 percent. Over the same period, corporate profit’s share rose from 8 percent to about 13 percent. Much of this change though is likely cyclical and not permanent. As can be seen in the last business cycle, corporate profits are apt to fluctuate over a cycle, tending to peak as a share of national income well before the end of the cycle.
Over this business cycle, rental income has fallen to 0.6 from 1.7 percent. This is mostly due to homeownership rates reaching record levels. Whether this is a permanent shift will become apparent as the housing slump plays out. Lastly, while proprietor’s income has remained fairly flat over this cycle, since 1990 its share of national income has increased to 8.5 from 7.5 percent.
Finally, while not related to the business cycle, the economic impact of the conflicts in Iraq and Afghanistan also appear in the GDP accounts over this period. At the end of the Cold War, national defense accounted for 6.8 percent of GDP. With the “peace dividend” that share fell to 3.9 just prior to the 9/11 tragedy. Since then, national defense’s share has averaged 4.4 percent.