c y c l i c a l Business Cycles Explained

Cyclical business cycles can be complex, but let's break it down. They occur when an economy experiences periods of expansion and contraction, often due to external factors.

These fluctuations can be triggered by various events, such as changes in government policies or technological advancements. The economy can expand rapidly, leading to high economic growth and low unemployment, but this can also lead to inflation.

A key characteristic of cyclical business cycles is that they are not driven by fundamental changes in the economy, but rather by temporary factors. This means that the economy can return to its previous growth path once the external factors subside.

In other words, cyclical business cycles are like a rollercoaster ride, with periods of high growth and low growth.

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A cyclical industry is one that's sensitive to the wider business cycle, which means its revenues will be higher when the economy is prosperous and lower during recessions. This is because consumers tend to prioritize essential expenses over non-essential ones during economic downturns.

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Cyclical industries can be identified by looking at consumer purchasing behaviors, such as how consumers limit their spending on non-essential goods and services during economic downturns. The airline industry is a classic example of a cyclical industry, as consumers tend to be more conservative about airfare spending during economic downturns.

Some common examples of cyclical industries include auto components, construction, semiconductors, steel, airlines, hotels, restaurants, and leisure, and textile, apparel, and luxury goods. These industries tend to be more correlated with each other, meaning that their performance is often linked.

Businesses in cyclical industries can prepare for recessions by reducing their spending and downsizing their workforce when they perceive signs of a downturn. This can help them weather the economic storm and come out stronger on the other side.

Here are some key characteristics of cyclical industries:

Cyclical industries are sensitive to the business cycle, with revenues generally higher in periods of economic prosperity and expansion, and lower in periods of economic downturn and contraction.

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Companies in these industries often struggle with volatility, but they can mitigate this by implementing employee layoffs and cuts during bad times.

In good times, they can pay bonuses and hire en masse to take advantage of the economic boom.

This type of industry is characterized by fluctuations in revenue and demand, making it essential for businesses to adapt and respond to changing economic conditions.

To cope with volatility, companies in cyclical industries can use strategies like cutting costs and reducing workforce during economic downturns.

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Cyclical industries tend to perform poorly during economic downturns due to lower disposable income of consumers.

Companies in cyclical industries see their performance deteriorate more significantly than those in non-cyclical industries.

It's not that non-cyclical industries perform strongly during downturns, but rather their performance is less negatively impacted.

US companies in non-cyclical industries took a hit during the 2008 Global Financial Crisis, but not as badly as those in cyclical industries.

The automobile sector, a cyclical industry, performed significantly weaker than the beverage sector, a non-cyclical industry, during the financial crisis.

The graph provided by Societe Generale shows the stark contrast in performance between these two sectors over a 15-year period (1998-2013).

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Analyzing financial statements is a common method for evaluating the cyclicality of an industry. Industries with high revenue volatility are likely to be more cyclical.

Revenue volatility can be a strong indicator of an industry's cyclicality. A 75% year-over-year revenue deterioration, as seen in Company B, is a significant impact from the business cycle.

Company size and specific issues can be excluded when evaluating revenue volatility. This allows for a clearer picture of an industry's cyclicality.

Identifying cyclical industries is crucial for making informed investment decisions. By understanding an industry's cyclicality, investors can better anticipate future market trends.

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The business cycle is a natural part of the economy, with four distinct phases: expansionary, peak, contractionary, and trough. The expansionary phase is where productivity grows, unemployment shrinks, and stock markets rise.

During this phase, people have more discretionary income and are less hesitant to spend it. This is because more people are employed and their investment portfolios are growing.

The peak follows the expansionary phase, marking the end of expansion and the beginning of contraction. Discretionary income falls during contraction, as more people become unemployed and productivity decreases.

A recession occurs during the contractionary phase, characterized by two consecutive quarterly declines in GDP. Not all periods of contraction result in recessions, however.

The trough is the final phase, where the economy bottoms out before starting the cycle anew. This phase is crucial in understanding the cyclical nature of the economy.

Cyclical stocks, such as those in the automobile and construction industries, are heavily correlated with the fluctuations in the wider economy. These stocks tend to rise during periods of prosperity and fall during recessions.

Some examples of cyclical industries include durable goods and construction, where a small change in consumer discretionary income can cause a sharp reduction in company profits.

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Cycles have been a part of human history, and various theories have emerged to explain these patterns. The Schlesingers proposed a liberal-conservative cycle, where liberal phases are marked by an increase in democracy, public purpose, and human rights, while conservative phases prioritize private interest and property rights.

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Liberal phases, as identified by the Schlesingers, are characterized by bursts of reform effort, which can be exhausting, leading to a need for the rest of a conservative phase. This cycle has been observed in the United States, with liberal phases typically lasting around 12 years and conservative phases lasting around 20 years.

The Schlesingers' cycle is self-generating, meaning that each kind of phase generates the other kind of phase. This process repeats, causing cycles. Arthur Schlesinger Jr. speculated on possible reasons for these transitions, including generational effects, as most liberal-conservative phase pairs are roughly 30 years long, roughly the length of a human generation.

Some notable liberal phases include the Jacksonian Democracy (1829-1841), the Abolition of Slavery and Reconstruction (1861-1869), and the Progressive Era, World War I (1901-1919). These phases were marked by significant reforms and changes in the social and political landscape.

The Schlesingers' cycle has been compared to other periodizations of United States history, including Andrew S. McFarland's identification of liberal phases as reform ones and conservative phases as business ones. McFarland's model roughly agrees with the Schlesingers' identifications.

Here's a comparison of the Schlesingers' cycle and McFarland's model:

This comparison highlights the similarities and differences between the two models, providing a deeper understanding of the liberal-conservative cycle in the United States.

Countercyclical industries are less sensitive to changes in the wider economic environment, meaning they often perform better during a downturn.

These industries include utilities, which provide essential services like electricity and water, and healthcare businesses, which are always in demand. Consumer staples, such as food and household essentials, are also considered countercyclical.

Companies in these industries tend to see an increase in profits during economic hardship, as consumers don't reduce their consumption of essential goods and services.

A company's characteristics can be defined by several key factors. Cyclical companies, for instance, are sensitive to interest rate fluctuations or changes in consumer discretionary spending.

These industries are particularly vulnerable to economic downturns, as seen in the example of SoFi, which notes that an increase in unemployment or interest rates can cause a cash crunch due to reduced spending.

Cyclical companies often struggle to maintain profit margins during economic downturns. This is because reduced spending makes it difficult for them to stay afloat.

In contrast, countercyclical stocks tend to perform well during economic downturns.

Schlesinger's Liberal-Conservative Cycle is a theory that suggests American history follows a pattern of liberal and conservative phases, each lasting around 12 years. This cycle has been observed since the American Revolution in 1776.

The cycle is characterized by a shift from liberal to conservative phases, with the liberal phases marked by an increase in democracy, public purpose, and human rights, while the conservative phases are marked by a focus on private interest and property rights.

Here's a breakdown of the cycle:

The Schlesingers proposed that their cycles are "self-generating", meaning that each kind of phase generates the other kind of phase. Arthur Schlesinger Jr. speculated that since liberal phases involve bursts of reform effort, such bursts can be exhausting, and the body politic thus needs the rest of a conservative phase.