Inventories and the Three Phases of the Business Cycle

This article demonstrates that recessions typically are followed by high-growth recovery phases that push output back to its prerecession level. Thus postwar fluctuations in real output in the United States have consisted of three sequential phases rather than two—contractions, high-growth recoveries, and moderate-growth periods following recoveries. Data from before World War II also exhibit this pattern. For the postwar period, the three-phase pattern is shown to reflect swings in inventory investment and suggests that output fluctuations have an important transitory component. The evidence in this article supports DeLong and Summers's output-gaps view and Friedman's “plucking” model view of fluctuations.