Fundamental Analysis

Cyclical industries

What is a cyclical industry?

A cyclical industry is one that is sensitive to the business cycle, typically having higher incomes during booms and expansions and lower incomes during downturns and contractions. Companies in cyclical industries can deal with this type of volatility by laying off workers and layoffs to compensate in bad times and pay bonuses and collective hiring in good times.

What is a cyclical industry?

Understanding Cyclical Industries

Cyclical industries are sensitive to business cycles, so cyclical downturns force consumers to prioritize spending and potentially cut some unnecessary costs. As a result, sectors that focus on discretionary items face the greatest risk of lost revenue when the economy contracts. By contrast, industries such as utilities tend to weather economic storms better because most people will find a way to pay their electricity bills, no matter how bad the times.

business cycle

The business cycle consists of four separate phases. During the expansion phase, productivity increases, unemployment falls, and the stock market tends to rise. Because more people are employed at this stage, their portfolios are growing, they have more discretionary income and are less reticent about spending. The peak occurs after the expansion phase. At this point, the economy has reached the end of an expansion, followed by a contraction phase.

Discretionary income falls during contractions as more people are unemployed and less productive. Recessions occur during contractionary phases, although not all contractionary phases lead to recessions. In the United States, two consecutive quarters of declines in gross domestic product (GDP) are the most common criterion for a recession. The final stage of the business cycle is the trough. This phase is when the economy bottoms out before restarting the cycle and beginning another phase of contraction.

Examples of Cyclical Industries

Industries that produce durable goods such as raw materials and heavy equipment tend to be cyclical. Consumer discretionary, a sector that focuses on products and services that people buy with disposable income, is also highly sensitive to business cycles, as discretionary spending is easier to cut from consumers’ budgets than essential costs in difficult times. .

For example, the aviation industry is a fairly cyclical industry. In good times, people have more disposable income, so they prefer to go on vacation and take advantage of air travel. Conversely, in times of economic downturn, people are more cautious about spending. As a result, they tend to vacation closer to home (if they do) and avoid expensive air travel.

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