Suppose I had perfect knowledge about the economy. So I knew exactly what the right monetary policy would be to keep the economy growing along some sustainable path. And I knew exactly what that sustainable path would look like.
I would then be able to tell the difference between:
1. Monetary policy is too loose, and the economy is in an unsustainable boom. Maybe the boom can be prolonged for a bit, by making monetary policy even looser. But eventually the boom must end, and ouput and employment will fall. Maybe they will even fall temporarily below the sustainable path, because adjustment is difficult. Either way, the end of a boom will look like a recession.
2. Monetary policy is not too loose, and the economy is growing along the sustainable path. Then monetary policy suddenly becomes too tight, and output and employment drop below the sustainable path. The economy is in recession.
But I don't have perfect knowledge about the economy, and I don't know exactly what the right monetary policy would be to keep the economy growing along some sustainable path, and I don't know exactly what that sustainable path would look like.
I think that both 1 and 2 are theoretically possible. (But maybe some people think that only 1 is theoretically possible, and other people think that only 2 is theoretically possible?)
I think that it is impossible to have a monetary policy with only 1 and never 2, and also impossible to have a monetary policy with only 2 and never 1. That's because I believe in some sort of long run neutrality of money: so it is theoretically impossible to have monetary policy sometimes too loose and never too tight; and also theoretically impossible to have monetary policy sometimes too tight and never too loose. (It would be like saying monetary policy could sometimes be looser than average but never tighter than average; or that monetary policy could sometimes be tighter than average but never looser than average.)
If I thought that the true model of the economy were linear, so that there was symmettry between loose money/booms and tight money/recessions, then I would say that the total amount of boom was exactly equal to the total amount of recession. In other words, if we bulldozed the tops off the hills, and used the material to fill in the valleys, then the elevation would be exactly the same as the sustainable path with no booms or recessions. (The sustainable path might still be better, because you normally need a non-linear utility function to generate linear demand and supply curves. People like smoothness.)
If the economy were linear, and if the sustainable path were also linear, it would be much easier to spot a boom. "Is economic activity higher than average? We must be in a boom."
But I don't think the true model of the economy is linear. Even if money is long run neutral, so that we see as much loose money as tight money, loose money causes small booms while tight money causes bigger recessions. If you believe in some sort of aggregate demand theory of business cycles, then this sort of non-linearity is inevitable, because loose money will cause the economy to hit some supply constraints. And if booms are smaller than recessions, economic activity can be higher than average even if the economy is not in a boom.
Milton Friedman's plucking model suggests to me that the economy is very non-linear. Empirically, the bigger the fall, the bigger the subsequent rise. But it is not true that the bigger the rise, the bigger the subsequent fall. Or, to use Scott Sumner's metaphor, what look like mountains are really just places in the high plateau where there is no valley. How much you climb down one valley determines how much you climb up the other side, but how much you climb up one side does not determine how much you climb down the next valley. There are recessions (valleys), but no booms (mountains).
I used to think that if inflation was rising (or above target), we were probably in a boom, and if inflation were falling (or below target) we were probably in a recession. Now I'm not so sure about that, because the last recession sure looked like a recession, but inflation wasn't giving its usual signature.