E C O N O M I C R E P O R T O F T H E P R E S I D E N T

Sources of Business Cycle ModerationOne source of moderation in the business cycle is the changing nature of theU.S. economy. Historically, inventories have been one of the most volatilecomponents of spending. Businesses now tend to operate with much leanerinventory stocks than before, and they appear to be better able to adjust thesestocks to changing economic conditions. The composition of output has alsotended to move from more volatile toward less volatile sectors. Spending onservices, which tends to be relatively insensitive to cyclical fluctuations, madeup over half of GDP in 1999, compared with less than a third in 1950. Conversely,the cyclically sensitive manufacturing sector makes up a smaller share ofaggregate output and employment than in the past.The growing role of stabilization policies—fiscal and monetary policies,which buffer the effects of destabilizing influences on the economy—may alsohave contributed to this moderation of the business cycle. Over the last century,the role of fiscal policy in affecting the business cycle not only has grown buthas indeed changed fundamentally. At the beginning of the 20th century, theFederal Government’s role in the economy was tiny. In 1900 there was no Federalincome tax and no Social Security, and total Federal receipts equaled amere 3 percent of GNP. The Nation’s monetary policy was generally one ofsimple adherence to the gold standard, which limited the use of monetary policyas a stabilizing tool.The Federal Government’s role in macroeconomic stabilization grew inimportance following World War II. Although the income tax had been76 | Economic Report of the President