The U.S. Business Cycle, 1867-1995: Dynamic Factor Analysis vs. Reconstructed National Accounts1

This paper presents insights on U.S. business cycle volatility since 1867 derived from diffusionindices. We employ a Bayesian dynamic factor model to obtain aggregate and sectoral economicactivity indices. We find a remarkable increase in volatility across World War I, which isreversed after World War II. While we can generate evidence of postwar moderation relative topre-1914, this evidence is not robust to structural change, implemented by time-varying factorloadings. We do find evidence of moderation in the nominal series, however, and reproducethe standard result of moderation since the 1980s. Our estimates broadly confirm the NBERhistorical business cycle chronology as well the National Income and Product Accounts, exceptfor World War II where they support alternative estimates of Kuznets (1952).[...]