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| This article describes a concept which could impact a variety of companies, countries or industries. To see what companies and articles reference this concept page, click here. |
For information about the issues affecting the U.S. economy in 2008, see 2008 Financial Crisis and 2009 Financial Crisis.
The concept of Economic Cycles, which are sometimes referred to as Business Cycles, is a theory that attempts to explain changes in economic activity that vary from a long term growth trend as observed in a developed market economy. Factors considered in defining an economic cycle include growth of GDP, household income, employment rates, etc. Economic Cycles are divided into two main categories: booms and recessions. Booms are associated with a strong economy, while recessions are characterized by below-trend economic growth. The National Bureau of Economic Research (NBER) is considered the authoritative source in the US that reports the dates of the peaks and troughs that quantify Economic Cycles. NBER defines economic cycles a bit differently than Economic Cycle Theory. Rather than booms and recessions, it classifies the economy as being in expansion or contraction. Expansion is when several pieces of economic data are improving, and contraction is a decline in the same data. These definitions focus more on the movement of data, whereas the boom/recession definition only refers to the data's position relative to historical averages.The basic idea behind economic cycles is that they're more than just mere fluctuations in economic activity and are significant enough to be "widely diffused over the economy." [1]. A short term decline in economic activity has historically been observed to be followed by a short term gain in economic activity. Observed over longer periods, the highs and lows average out to form the trend, or average, economic growth rate. The Economic Cycles Theory holds that although this trend growth rate is subject to change, it has remained relatively steady in the past, thus theoretically indicating the general rate of economic growth that we can expect to see in the mid-term future. No attempt is made by Economic Cycles Theory to describe economic activity during extended periods of decline, only growth.
Key features of an economic boom:
Key features of a recession:
While the economy as a whole is negatively impacted by economic cycles, certain companies and industries are particularly sensitive to changes in the overall state of the economy. Manufacturers of durable goods like cars, appliances, and electronics are among the most impacted. When times are bad, people tend to cut back on the purchase of durables, as the ones they already have can generally last through the recession. At the same time, durables usually benefit the most from booms. As disposable income increases, consumers are likely to go out and buy that new car they've been holding out on. In addition to manufacturers, financial institutions are susceptible to declining demand for financial services and an overall decrease in the amount of money flowing through the economy.
Transportation
Manufacturing
Construction
Investment services
Commercial Real Estate Service Firms
Hotels
Other Areas of Discretionary Spending
Education
On the other hand, certain goods are relatively insulated from the impact of economic cycles. Goods that have a relatively elastic demand with respect to income are generally shielded. For example, food has a very inelastic demand. No matter how bad the economy gets, people have to eat and will continue to purchase food. This is particular for staple foods and goods like insulin and bread. However, when the economy improves, we generally don't eat more, though the quality of our diet may improve.
Food manufacturers and retailers
Tobacco companies
Utilities
Milton Friedman has said that economic cycles aren't really "cycles" that there is no clear beginning and end unlike the seasonal cycle for, among other economic activity, retail sales and seasonal credit cycle which peak before summer and trough after.
The Chicago School emphasizes the correlation between the "credit cycle" and the business cycle. These economists argue that interest rates act as the general price level for money and that the monetary causes the shifts in the business cycle. This school of thought believes that correct manipulation of monetary policy, mostly through the Federal Reserve can eliminate the business cycles. The thinking goes that by correctly increasing and decreasing the supply of money at the right time, the toughs and bubbles can be avoided.[2]
This school of thought disagrees with traditional economics in that there is no linear equilibrium that the economy trends towards. Instead, society is filled with a series of individuals who use rule of thumb judgments based on incomplete information sets. The result is a dynamic, chaotic system with no clear distinction between micro and macro economics. Eric Beinhocker views economic cycles from a network and game theory perspective. This view re-frames cycles in terms of evolutionary growth rather than having a discrete beginning and end.
The exponential growth of an economic bubble is unsustainable and results in synchronized weath destruction when the bubble collapses. On a global scale this reinforces the periodicity of the cycle because the entire world economy must go through the recovery at the same time. Individual savings and investment behaviors become synchronized so that the next bubble occurs 30-40 years later.
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