Download Business Cycle Analysis from 1945-1954

Business Cycle Analysis from 1945-1954
Mary Oehler
Joe Rapacz
The time period from 1945-1954 experienced three contractions lasting an average of
nine and a half months and two expansions lasting three years and 3.75 years
respectively. The data used to show this information include Gross Domestic Product,
the Unemployment Rate and the Consumer Price Index.
The first contraction of the time period began in February of 1945 and ended in October
of 1945. Production in real GDP declined during that year 1.1% and the unemployment
rate climbed to 6.6%. The table and graph do not show this year because the Bureau of
Labor Statistics did not include this time period in the historical data. Prices were
increasing steady with a 2.5% change from month to month most of 1945.
The expansion of the 10 year period began at the trough in October of 1945 and climbed
steadily to the next peak in November of 1948. Real GDP as reflected in the included
graph and table show a reduction in production at first in 1946 after the war. The rate of 10.9% was low however, the economy improved greatly to -.9% in 1947 and 4.4%
increase in growth in 1948 before the next peak. The unemployment rate was 3.75% in
1948 as reported in the table and graph before the economy weakened again. The CPI
remained low with one spike in July of 1946 of 5.9%. Inflation started in April of 1946
and increased to double-digits from August of 1946 to October of 1947. This inflationary
time included a 14.4% inflation rate.
The second contraction of the time period lasted from November 1948 to October of
1949………Discuss GDP information from your graphs and tables, discuss
unemployment numbers from the graphs and tables. Finally, include CPI information….
The second expansion of the 1945-1954 time period began in October of 1949 and lasted
45 months to July of 1953…….Include information on GDP, unemployment, and CPI.
Finally, the last contraction from July 1953 to May of 1954 was characterized by
unemployment. In July of 1953, the unemployment rate was 2.6% as reported on the
table. This number increased to its highest of the time period of 6.1% in August of 1954.
This was after the trough, but the economy was weak due to unemployment. The GDP
did well in 1953 at an increase of 4.6%. Inflation was subdued at .7% and .8%
In these difficult times, the government may use its tools of fiscal and monetary policy to
deal with the economy. The government during the 1945-1954 time period did not get as
involved as it does today. Some of the actions taken included changing the discount rate.
The discount rate is the rate that the Federal Reserve banks charge commercial banks that
borrow money. If the rate is low, banks will borrow more. If the rate is high, the banks
will not borrow as much. The Federal Reserve did not become involved as they did not
increase or decrease the discount rate for 1945-47. The Fed increased the interest rate to
1.5% in September of 1948 and stayed there until August of 1950. The rate then
increased to 1.59% and then 1.75%. This was during the long expansion of 1949-1953.
The Fed increased the rate to 1.88% in January of 1953 and then 2% from February,
1953, to December of 1953. The Federal Reserve did this in response to the high
inflation during the expansion to slow down the economy. The last change included the
decrease to 1.79%, 1.75%, and 1.62% in the beginning of 1954 as the recession hit. The
Federal Reserve kept the interest rate low again through 1954 to 1.5% to help with early
recovery phase of the business cycle.
The federal government also made policy during this time concerning the federal budgets
and income tax codes. This is known as fiscal policy. Discuss how fiscal policy is
determined (national budget and tax code). During the first contraction in 1945, the
government ran a deficit of $47.5 million dollars which was a good response to the
increased unemployment rate post-war. The federal budget was in surplus during 1947,
1948, and 1949 and corresponded to the inflation during that expansion. The budget was
in deficit in 1950 and 1954 to counter the elevated unemployment rates. This was also
the Korean War requiring increased government spending. Inflation was not a problem at
the time so the additional spending did not create demand-pull inflation.
The federal government also conducted some tax code changes during this time period.
The income for the lowest bracket did not change from $2000 in the time period, but the
upper income limit increased as the code switched from “Married Filing Jointly” to
“Head of Household”. During the most inflationary time of 1946-48, the tax code
increased very little. This is counter to what economists would suggest during doubledigit inflation.
In conclusion, the time period from 1945-1954 included three short contractions 2 longer
expansion. During this time, the federal government because somewhat involved in the
economy through unemployment compensation in recessions and increasing interest rates
during inflation. The Federal Reserve did something to slow down the severe inflation
by increasing the discount rate, but were very moderate in the increases. The Congress
and President adjusted the budget during the time, but did not adjust the tax code to curb
inflation. The Federal Reserve and federal government was not as responsive as they are
today to changes in the business cycle.