U.S. Economic Cycles

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See all Bulls Reasons Bulls Perspectives Long Term Secular Trend is Powerful 100% agree Long Term Secular Trend is Powerful Will Malthus be denied --- yet again? “I think I may fairly make two postulata. First, That food is necessary to the existence of man. Secondly, That the passion between the sexes is necessary and will remain nearly in its present state. These two laws, ever since we... read more View or Edit Reason 2 votes 100% agree Markets are Predictive 100% agree Markets are Predictive Back in October 2007 the markets started unwinding. With the benefit of hindsight we now know that it was the beginning of a bear market. The stock market is perhaps the most efficient forward looking indicator, and in October 2007, it told us that a recession could be... read more View or Edit Reason 2 votes 100% agree Market Valuation & Psycology 100% agree Market Valuation & Psycology The market moves through a cycle. During each phase there are different sectors which outperform and others which underperform. While the intensity and duration of a phase cannot be predicted, economic indicators give a fairly clear picture of where we are in the... read more View or Edit Reason 1 votes 100% agree See all Bears Reasons Bears Perspectives Economic cycles are cyclical based on two competing forces, which are..... 85% agree Economic cycles are cyclical based on two competing forces, which are..... ...greed and fear. Which ever one is in favor drives the market, until a point where the other cannot be ignored. View or Edit Reason 7 votes 85% agree Economic cycles are not cyclical at all. 63% agree Economic cycles are not cyclical at all. They are non-linear dynamic. They are naturally chaotic and complex patterns. A cycle is a nail in a tire. It clicks with every revolution. Business and economies don't "cycle" because they are not round. Economic fluctuations are beautiful, natural, unique. They are not... read more View or Edit Reason 11 votes 63% agree Send the authors a comment or suggestion It would be intersting to see acomparison of the effects of business cycles on manufacturing and ... more [Dismiss] [Done] See All Suggestions

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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.

Graphical representation of economic cycles

The basic idea behind economic cycles is that they're just that: cycles. Any steep decline in economic activity will likely be offset by future surges in the economy's growth. In the long term, the highs and lows average out to form the trend, or average, economic growth rate. This trend growth rate is subject to change, but it has remained relatively steady in the past, indicating the general rate of growth that we can expect to see in the future.

[edit] Booms and Expansions

Key features of an economic boom:

• Above-trend GDP growth
• Higher disposable incomes
• Less unemployment
• Increased consumer spending

[edit] Recessions and Contractions

Key features of a recession:

• Below-average GDP growth. The historical definition of a recession is when the economy has two consecutive quarters of negative growth. Usually by the time the official reports come available to identify a recession the market has already priced in the recession. Most recessions have a time span of 18-24 months.
• Lower disposable incomes
• Higher unemployment rates
• Decreased consumer spending is caused by the above mentioned conditions, lower disposable income from inflationary pressures, higher commodity prices such as oil, or food sources. The less spending can lead to higher unemployment. Many times this first shows in the retail sector. The three items mentioned, basically, will manifest itself on the other and snowball into a recessionary period.

[edit] Who's particularly impacted by economic cycles?

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

• General Motors (GM), Ford Motor Company (F), DAIMLERCHRYSLER AG (DCX), and other car companies can be significantly impacted by recessions. During economic downturns, people often put off buying new cars until later, or buy less expensive models.
• United Airlines (UAUA), Air France ADS (AKH), and British Airways plc (LON:BAY) are three leading airlines, which tend to suffer during recessions.
• FedEx (FDX) and United Parcel Service (UPS) are the two leading package carriers. The volume of packages mailed is highly correlated with macroeconomic conditions, subjecting FedEx and UPS to cyclical swings in revenues and profits.

Manufacturing

• Whirlpool (WHR), and Sears Holdings (SHLD) are all leading manufacturers of home appliances, which are subject to declining demand for durable goods. In addition to people's tendency to avoid larger purchases during recessions, the demand for appliances is tightly linked to new home sales, which also tend to slow during recessions.
• Alcoa (AA) and US Steel (X) produce aluminum and steel, respectively. These two materials are used in a wide range of construction and manufacturing capacities, subjecting them to the performance of their end markets.
• Caterpillar (CAT) and Tractor Supply Company (TSCO) both manufacture farming equipment. As farmers feel the effects of economic fluctuations, they tend to adjust their large equipment purchases accordingly.

Construction

• D.R. Horton (DHI), Lennar (LEN), Toll Brothers (TOL), and Pulte Homes (PHM) are large companies in the residential construction industry. With the declining demand for durable goods, new home sales are likely to decrease as well.
• Foster Wheeler (FWLT) and CRH (CRH) are both involved in construction. FWLT provides construction services to various industrial customers, and CRH manufactures and distributes building materials, like cement and premixed concrete.
• The performance of Home Depot (HD), Lowe's Companies (LOW), and other home improvement retailers is largely correlated to the housing market. Any declines in new home construction or renovations would likely harm retailers such as these.

Investment services

• Bear Stearns Companies (BSC), Merrill Lynch (MER), Morgan Stanley (MS), Goldman Sachs Group (GS), Credit Suisse Group (CS), Lehman Brothers Fin SA (LEH), UBS AG (UBS), J P Morgan Chase (JPM), Lazard (LAZ), Jefferies Group (JEF), and other providers of investment services can be negatively impacted by recessions. On the other hand, these firms are likely to benefit from economic booms as customers' demand for financial services increases.

• Real Estate Investment Trusts (REITs) such as Vornado Realty Trust (VNO) also tend to be particularly affected, as demand for lease space and properties varies with the economic cycle.

Hotels

• Choice Hotels International (CHH) and other hotel/lodging companies serving middle income customers can be negatively impacted by recessions.

Other Areas of Discretionary Spending

• Brink's Company (BCO) and other home security service providers which primarily serve single family residential consumers
• Zale (ZLC) and other luxury commodity sellers
• Omnicom Group (OMC), Interpublic Group of Companies (IPG) and other advertising firms suffer during recessions since advertising budgets are viewed as discretionary spending by many of their clients and are often one of the first areas where firms cut costs during a slowdown.

Education

• Apollo Group (APOL), Career Education (CECO), ITT Educational Services (ESI) and other education providers typically see enrollment increase during economic downturns as poorer job prospects cause prospective students to view continuing eduction more favorably. During the 2001 recession, enrollment growth at four-year for-profit education institutions doubled, and during the first years of recessions over the last four decades, enrollment growth in two-year education programs has increased by an average of 12%.

[edit] Who's relatively less impacted by economic cycles?

On the other hand, certain goods are relatively insulated from the impact of economic cycles. Food is an example of a good that has very inelastic demand. No matter how bad the economy gets, people have to eat. When the economy improves, we generally don't eat more, though the quality of our diet may improve.

Food manufacturers and retailers

• Safeway (SWY), Wal-Mart Stores (WMT), Sysco (SYY), and other food retailers are somewhat protected from recessions. For health reasons, the demand for food is unlikely to decrease below a certain level, giving food retailers some degree of insulation from poor economic conditions.
• Pepsico (PEP), Kraft Foods (KFT), and H.J. Heinz Company (HNZ), as well as other food manufacturers, generally see a smaller decline in sales resulting from a recession.

Tobacco companies

• Altria Group (MO), Loews (CG), and REYNOLDS AMERICAN (RAI) are the three largest tobacco companies in the U.S. Though cigarettes are not generally considered necessities, they still have somewhat inelastic demand. The addictive nature of cigarettes affords tobacco companies some protection from recessions, up to a point.

Utilities

• Exelon (EXC), Entergy (ETR), and other providers of electricity are unlikely to suffer greatly during a recession.

[edit] Economic Theory

[edit] Chicago School

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.

Most economists note the high correlation of the so-called "credit cycle", punctuated by monetary growth and decay, to the so-called "economic cycle", Keynes and Friedman included.

[edit] Complexity 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 discreet beginning and end.