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global economic cycle

Page history last edited by Brian D Butler 14 years, 5 months ago

Global Economic Cycles

 

The aftermath of that speculation and its impact on the economy has been thoroughly studied prior to our present business cycle by the economists of yesteryear who marveled at the mania in the collective mindset of private citizens and their elected representatives who produced such bubbles. The most famous of these economists was Irving Fisher (1867-1947), who in 1933 wrote about this problem of over-indebtedness (Irving Fisher, 1933, Econometrica, "The Debt-Deflation Theory of Great Depressions"). He stated flatly that over-indebtedness was the difference between normal business cycles (recessions), which occur frequently through "over-production, inventory misjudgment, or commodity price fluctuations" and extreme business cycle fluctuations (depressions). Based on his analysis of the great depressions of 1837, 1873, and 1929 he outlined a pattern of economic developments that will take place when the debt cycle is broken

 

 

Business Cycles:

 

 

Cyclical swings in the economy are as old as mankind. The Bible tells us about seven fat years in Egypt followed by seven lean years. Each economic system has its economic policy instruments to deal with swings. In ancient Egypt, Joseph’s warnings led to the creation of granaries. In feudal ages, the tools were control over the composition of coins, and severe restrictions on land and its workforce. These policies, in turn, became outdated for the industrial age, which pursued aggregate demand enhancement by governmental spending and taxation, control of the money supply, and manipulations of interest rates.  Source:   Eli Noam

 

 

 

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

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

  • 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

  • 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

 

 

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

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

 

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