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1350.0 - Australian Economic Indicators, 1992  
Previous ISSUE Released at 11:30 AM (CANBERRA TIME) 18/09/1992   
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1992 Feature Article - The Business Cycle in Australia: 1959 to 1992
This article was published in Australian Economic Indicators August 1992 issue on 3 August 1992.


Introduction

The ABS is exploring means of providing more useful early signals of movements in economic time series. In particular it is:

  • undertaking feasibility studies to collect additional data on businesses’ and householders’ expectations;
  • refining the analysis and interpretation of the expectations data it collects; and
  • investigating the leads and lags between economic time series, with a view to developing composite leading indicators of economic activity.

This article is an attempt to date and measure the Australian business cycle. It is the first in a series to be published in the AEI to study the time relationships between the business cycle and the main economic indicators.

Business cycles were given the following definition by Burns and Mitchell from the National Bureau of Economic Research (NBER) of the United States in 1946:

“Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organise their work mainly in business enterprises: a cycle consists of expansions occurring at the same time in many economic activities followed by similar general recessions, contractions and revivals which merge into the expansion phase of the next cycle; this sequence of changes is recurrent but not periodic...".

This definition has been quoted many times and is still appropriate. Monitoring the fluctuations in aggregate economic activity is of crucial importance to decision makers, both in economic policy making and in business activities. Dating the past turning points of the business cycle and measuring the relative sizes of the successive fluctuations permit the study of the time relationships between different economic indicators. The knowledge of these past relationships assists in the detection of current and future turning points. The research of the turning points in economic activity, called cyclical analysis, was pioneered in the early 1930s by Burns and Mitchell. Since then, this approach to economic analysis has been used and developed in many countries, including Australia.

Cyclical analysis has developed its own terminology which is worth detailing in this introduction. The succession of fluctuations in the aggregate economic activity is named the business cycle, sometimes the reference cycle. The chronology of turning points, which is the dates of the peaks and the troughs
delimiting expansions and contractions of the general economic activity, is generally referred to as the reference chronology. A cycle is composed of two phases, an expansion and a contraction (or recession).

Methodology

The objective here is to have the broadest possible measure of aggregate economic activity, so the Burns and Mitchell definition has been applied to the average of the three estimates of constant price gross domestic product (GDP(A)). Some previous analyses of the business cycle, particularly in the United States and Australia, have focused on aggregate general economic activity represented by a cluster of economic indicators. This approach, justified for a monthly analysis or when only poor national accounts data are available, has not been followed here. The present study is focused on a quarterly analysis of the business cycle. GDP(A) is the quarterly series which has the broadest economic coverage possible across industries, economic agents, income, expenditure and output (ABS, 1990). Besides these qualities, GDP(A) has the advantage of being recognised by any user of economic statistics. Quarterly estimates of production-based GDP are only available from September 1974 onwards. Before this date GDP(A) is a weighted average of expenditure and income based GDP.

Another important element of this study is the length of cycles examined. Since the objective of this work is to provide insights into short-term fluctuations in the economy it has been decided to concentrate on cycles with total duration of two to eight years. This choice is consistent with the classical approach to measuring business cycles. Cycles of total duration shorter than two years are more likely to be associated with irregular movements including measurement errors and socio-economic shocks (Zarb, 1992). Fluctuations corresponding to cycles of durations longer than eight years, here known as long-term trend, originate from changes in structural factors such as technology, culture or demography.

Two approaches to cyclical analysis are commonly used. The “growth cycles” method is used by most of the institutions which have worked on business cycles determination (OECD, 1987) and is the method used in this study. The other commonly used method analyses the growth in the seasonally adjusted series. This implies, without any real justification, that the long-term trend is a deterministic function of time.

Using the “growth-cycle” method, time series can be broken down into seasonal and trading-day variations, irregular short-term movements, long-term trend and, finally, the business cycle components. Estimates of these different components are obtained by using filters. The solid line in Chart 1 shows the series of GDP(A) corrected for seasonal, trading day and irregular movements while the dotted line shows its long-term trend. The business cycle is obtained by removing the long-term trend element from the series already corrected for seasonal, trading day and irregular movements (ie. the deviations of the solid line from the dotted line in Chart 1). Chart 2 shows the result of this process: the deviation from the long-term trend of the smoothed GDP(A) from 1960. The vertical lines in Chart 1 and Chart 2 delineate the successive phases discussed below.

CHART 1. GDP(A) AT AVERAGE 1984-85 PRICES
Chart 1 shows GDP(A) trend and long-term trend at average 1984-85 prices from June 1959 to June 1992


CHART 2. GDP(A) DEVIATION FROM TREND
Chart 2 shows GDP(A) trend deviation from long-term trend from June 1959 to June 1992



The filters used in this study to eliminate the irregular and the long-term movements are, respectively, 7 and 33 term Henderson moving averages. When applied to a series corrected for seasonal and trading day movements they retain the fluctuations corresponding to cycles of 7 to 33 quarters length. The loss in terms of timeliness at end-points is minimal and no time-shift is induced. This methodology is also consistent with the general smoothing methods used by the ABS (ABS, 1987). This choice of filter offers the additional advantage of keeping the technique as simple as possible, from both users’ and statisticians’ points of view.

Using the deviation of smoothed GDP(A) from the long-term trend (Chart 2), turning points are selected visually amongst local minima and maxima. There may be an element of subjective judgement involved in the selection of turning points and two rules of thumb from the “Handbook of cyclical indicators” of the United States Bureau of Economic Analysis (BEA) are used for ambiguous cases (BEA, 1987). The first rule is that peaks and troughs must alternate. This rule enables the distinction between “double-turns” and full cycles. It also assists with the assessment of the validity of the most recent turning point. A turning point is clearly identified when either the next turning point has been identified or the corresponding phase has an amplitude greater than the smallest clearly recognised phase. The other rule of thumb used here is that the last value is chosen as the turning point in case of equal values.

Results and chronology

Table 1 gives the dates of turning points in the Australian business cycle together with the duration of each phase of cycle, expansions and contractions, and the total duration of each cycle. The relative amplitude of the deviation from the long-term trend at various turning points and the amplitude of each phase and of the total cycle are also presented in Table 1 . The amplitude of phase is simply measured by the sum of the absolute levels of amplitudes at each end of the phase. These measures are only meant to compare cycles in this study. The means of the different durations and amplitudes are also presented in Table 1. The last column shows the average annual percentage growth rate of the long-term trend during each cycle.


TABLE 1. THE AUSTRALIAN BUSINESS CYCLES

Dates of turning points
Duration (in quarters)
Amplitudes
Troughs
Peaks
Troughs
Expansions
Contractions
Total
Troughs
Peaks
Troughs
Expansions
Contractions
Total
Long term trend (%p.a.)

1960 Q3
1961 Q3
4
2.3
-2.5
4.8
1961 Q3
1965 Q1
1966 Q2
14
5
19
-2.5
1.5
-1.2
4.0
2.7
6.7
5.4
1966 Q2
1970 Q3
1972 Q2
17
7
24
-1.2
0.5
-1.1
1.7
1.6
3.3
5.6
1972 Q2
1973 Q4
1975 Q3
6
7
13
-1.1
1.3
-0.6
2.4
1.9
4.3
3.1
1975 Q3
1976 Q3
1977 Q4
4
5
9
-0.6
1.1
-1.6
1.7
2.7
4.4
2.6
1977 Q4
1978 Q4
1980 Q2
4
6
10
-1.6
1.0
-0.9
2.6
1.9
4.5
3.3
1980 Q2
1982 Q1
1983 Q1
7
4
11
-0.9
2.0
-3.1
2.9
5.1
8.0
1.7
1983 Q1
1985 Q3
1986 Q4
10
5
15
-3.1
1.8
-1.1
4.9
2.9
7.8
4.0
1986 Q4
1989 Q4
p1991 Q3
12
p7
p19
-1.1
1.5
p-1.1
2.6
p2.6
p5.2
p2.5
Mean
9
6
15
1.4
-1.5
2.9
2.9
5.5
p = provisional


Eight full cycles can be identified from 1960 to now, nine contractions and eight expansions, with the dates of the last phase being preliminary. The turning point observed in Q3 1991 might become a trough, in the sense of growth cycle analysis, only when the current phase has reached an amplitude larger than the smallest amplitude of phases observed up to now or when the next peak is reached. Several conclusions can be drawn from Table 1 and Chart 2:
  • The last three cycles have much larger amplitudes than the four preceding cycles from the mid 1960s to 1980.
  • Double-turns are present in five of the eight expansions, namely 1962, 1967, 1975, 1984 and 1987. None of these double-turns can be considered as cycles because their amplitudes and lengths are too small cormpared with the average of clearly recognised phases. The mild cycle observed in
    1977 Q4 - 1978 Q4 - 1980 Q2 is large enough to be a cycle on its own but appears as a double-turn in the chronology of non-farm GDP. The double-turns are relatively frequent which reinforces the need for care when identifying the most recent turning point of the period.
  • The long-term trend values show the slow-down observed since the beginning of the 1970s, with the exception of the acceleration of the mid 1980s. The average growth rate of the long-term trend during the last cycle was 2.5 per cent per annum.
  • The last cycle, 1986 Q4 - 1991 Q3, has the longest duration observed since the early 1970s with a 12 quarter expansion and a 7 quarter contraction. In terms of deviation from trend the last cycle is very similar to the previous one, 1983 Q1 - 1986 Q4. Both cycles started with a “double-turn”, more pronounced in the 1986 Q4 - 1989 Q4 expansion than in the previous one. Their contractionary phases have similar amplitudes The main difference in the two cycles is in the level of the long-term trend which was growing at an average of 4 per cent per year in the first one while growing at 2.5 per cent per year in the second.


Given the nature of the estimation of the business cycle which involves a long-term trend estimate, the amplitude of the most recent phase is provisional. It will be revised until the long-term trend converges towards a more definite value. More data are also needed to confirm the last turning point of the series and the characteristics of the corresponding phase.


Table 2 contains data used for this study for long-term trend, smoothed and percent deviation of the long-term trend of the GDP(A) series.

TABLE 2. GDP(A) AT AVERAGE 1984-85 PRICES, SMOOTHED, LONG-TERM TREND AND DEVIATION FROM TREND

Smoothed ($m)
Long-term Trend ($m)
Deviation (per cent)
Peak, Trough, Contraction or Expansion

1959 Q3
19740
19744
0.0
E
1959 Q4
19906
19871
0.2
E
1960 Q1
20249
20035
1.2
E
1960 Q2
20623
20199
2.1
E
1960 Q3
20840
20370
2.3
P
1960 Q4
20853
20545
1.5
C
1961 Q1
20687
20727
-0.2
C
1961 Q2
20513
20913
-1.9
C
1961 Q3
20571
21107
-2.5
T
1961 Q4
20910
21313
-1.9
E
1962 Q1
21377
21538
-0.8
E
1962 Q2
21775
21790
-0.1
E
1962 Q3
22119
22071
0.2
E
1962 Q4
22379
22382
0.0
E
1963 Q1
22640
22718
-0.3
E
1963 Q2
23015
23073
-0.3
E
1963 Q3
23454
23442
0.1
E
1963 Q4
23869
23816
0.2
E
1964 Q1
24183
24189
0.0
E
1964 Q2
24505
24554
-0.2
E
1964 Q3
24994
24907
0.4
E
1964 Q4
25529
25246
1.1
E
1965 Q1
25943
25572
1.5
P
1965 Q2
26204
25886
1.2
C
1965 Q3
26322
26193
0.5
C
1965 Q4
26374
26497
-0.5
C
1966 Q1
26493
26804
-1.2
C
1966 Q2
26786
27119
-1.2
T
1966 Q3
27262
27445
-0.7
E
1966 Q4
27840
27788
0.2
E
1967 Q1
28343
28154
0.7
E
1967 Q2
28657
28544
0.4
E
1967 Q3
28912
28961
-0.2
E
1967 Q4
29192
29404
-0.7
E
1968 Q1
29581
29870
-1.0
E
1968 Q2
30122
30357
-0.8
E
1968 Q3
30787
30860
-0.2
E
1968 Q4
31467
31373
0.3
E
1969 Q1
32050
31889
0.5
E
1969 Q2
32541
32400
0.4
E
1989 Q3
32977
32902
0.2
E
1969 Q4
33430
33392
0.1
E
1970 Q1
33903
33865
0.1
E
1970 Q2
34423
34323
0.3
E
1970 Q3
34933
34768
0.5
P
1970 Q4
35268
35199
0.2
C
1971 Q1
35574
35618
-0.1
C
1971 Q2
36077
36027
0.1
C
1971 Q2
36520
36428
0.3
C
1971 Q4
36820
36823
0.0
C
1972 Q1
36969
37212
-0.7
C
1972 Q2
37163
37594
-1.1
T
1972 Q3
37697
37965
-0.7
E
1972 Q4
38301
38323
-0.1
E
1973 Q1
38752
38665
0.2
E
1973 Q2
39207
38992
0.6
E
1973 Q3
39712
39303
1.0
E
1973 Q4
40109
39603
1.3
P
1974 Q1
40191
39893
0.7
C
1974 Q2
40110
40175
-0.2
C
1974 Q3
40182
40448
-0.7
C
1974 Q4
40469
40712
-0.6
C
1975 Q1
40781
40967
-0.5
C
1975 Q2
40964
41214
-0.6
C
1975 Q3
41193
41458
-0.6
T
1975 Q4
41531
41699
-0.4
E
1976 Q1
41983
41943
0.1
E
1976 Q2
42548
42196
0.8
E
1976 Q3
42932
42460
1.1
P
1978 Q4
43131
42736
0.9
C
1977 Q1
43292
43024
0.6
C
1977 Q2
43321
43322
0.0
C
1977 Q3
43255
43631
-0.9
C
1977 Q4
43260
43948
-1.6
1
1978 Q1
43598
44273
-1.5
E
1978 Q2
44309
44609
-0.7
E
1978 Q3
45125
44959
0.4
E
1978 Q4
45765
45327
1.0
P
1979 Q1
46085
45713
0.8
C
1979 Q2
46322
46117
0.4
C
1979 Q3
46624
46532
0.2
C
1979 Q4
46891
46947
-0.1
C
1980 Q1
47073
47345
-0.6
C
1980 Q2
47300
47715
-0.9
T
1980 Q3
47725
48042
-0.7
E
1980 Q4
48264
48322
-0.1
E
1981 Q1
48737
48553
0.4
E
1981 Q2
49194
48740
0.9
E
1981 Q3
49623
48890
1.5
E
1981 Q4
49980
49018
2.0
E
1982 Q1
50103
49139
2.0
P
1982 Q2
49903
49273
1.3
C
1982 Q3
49391
49437
-0.1
C
1982 Q4
48683
49647
-1.9
C
1983 Q1
48361
49915
-3.1
T
1983 Q2
48773
50249
-2.9
E
1983 Q3
49750
50654
-1.8
E
1983 Q4
50924
51125
-0.4
E
1984 Q1
51895
51654
0.5
E
1984 Q2
52501
52232
0.5
E
1984 Q3
53001
52844
0.3
E
1984 Q4
53606
53473
0.2
E
1985 Q1
54515
54102
0.8
E
1985 Q2
55548
54714
1.5
E
1985 Q3
56300
55298
1.8
P
1985 Q4
56556
55847
1.3
C
1986 Q1
58490
56360
0.2
C
1986 Q2
56462
56844
-0.7
C
1986 Q3
56690
57315
-1.1
C
1986 Q4
57154
57788
-1.1
T
1987 Q1
57765
58281
-0.9
E
1987 Q2
58495
58803
-0.5
E
1987 Q3
59352
59360
0.0
E
1987 Q4
60083
59946
0.2
E
1988 Q1
60494
60552
-0.1
E
1988 Q2
60842
61161
-0.5
E
1988 Q3
61344
61757
-0.7
E
1988 Q4
62112
62316
-0.3
E
1989 Q1
63024
62823
0.3
E
1989 Q2
63764
63263
0.8
E
1989 Q3
64367
63628
1.2
E
1989 Q4
64849
63915
1.5
P
1990 Q1
65030
64136
1.4
C
1990 Q2
64929
64308
1.0
C
1990 Q3
64656
64447
0.3
C
1990 Q4
64373
64565
-0.3
C
1990 Q1
64218
64670
-0.7
C
1991 Q2
64119
64765
-1.0
C
1991 Q3
64128
64852
-1.1
T
1991 Q4
64367
64931
-0.9
E
1992 Q1
64667
65003
-0.5
E
1992 Q2
64818
65060
-0.4
E
P = Peak, T = Trough, C = Contraction, E = Expansion



Conclusion

This article provides a dating of turning points of the Australian business cycle up to 1992 Q2, with the last turning point still being provisional. This chronology is used for the analysis of the time relationships of the cycles in individual economic indicators with those of general economic activity. The determination of leading and coincident indicators is derived from this work using the same techniques of filtering. The chronology of turning points in general economic activity can also be useful for analysing the behaviour of economic variables in the different phases of the business cycle.


This feature article was contributed by Gerard Salou and Cynthia Kim. Gerard Salou, of the OECD Statistics Directorate, was on a temporary assignment with the ABS. Cynthia Kim was an ABS officer.

References

Australian Bureau of Statistics, Australian National Accounts: National Income and Expenditure (cat. no. 5206.0), June quarter 1990.

Australian Bureau of Statistics, A Guide to Smoothing Time Series - Estimates of Trends (cat. no. 1316.0), 1987.

Bureau of Economic Analysis, Programmed Selection of Cyclical Turning Points, Handbook of Cyclical Indicators, 1987.

Burns, Arthur and Wesley Mitchell, Measuring Business Cycles, National Bureau of Economic Research, 1946.

OECD, OECD Leading lndicators and Business Cycles in Member Countries 1960-1985, Sources and Methods No. 39, January 1987.

Zarb, John, Smarter Data Use, Australian Economic Indicators, Australian Bureau of Statistics, March 1992.

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