An examination of the pattern of shifts in the US business cycles indicates that adjustments to downturn have been very fast in the past. An attempt to draw a meaningful prediction for the present downturn appears difficult.

The business cycle is an up-n- down movement of business activity. It consists of alternating periods of recessions and booms. Some recessions can be real bad. A good example is the Great Depression in the US. It started in 1929 after a stock market crash. By 1933, the real GDP had fallen by 30 percent and unemployment had increased to 25 percent of the labor force. The most recent slowdown cannot technically be described as recession as the GDP contracted (_1.3 percent) only in the third quarter of 2001. To call it a recession, we need at least two consecutive quarters of negative growth.

Past data reveals that recessions in the US have typically lasted over a year and real GDP has fallen from peak to trough by more than six percent. Expansions have lasted on an average for almost four years and real GDP has increased from trough to peak by an average of 22 percent. The billion dollar question today is whether we can make any meaningful predictions about the pattern of business cycles that may happen in the future. Understanding the structural changes which have taken place in the US in the recent past provides useful insights about why going by the past to predict the future may be dangerous.

Over the years, American labor markets have become more and more flexible. Easy hiring/firing, an increasing number of part-time workers and growing use of variable pay have facilitated quick responses to demand while protecting permanent jobs and maintaining the tempo of consumption by households. The peak unemployment rate of 5.8 percent during December 2001 was well below that during past recessions. For example, during the 1981-91 downturn, the highest unemployment rate was 10.8 percent.

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