CandleFocus

Cyclical Industry

A cyclical industry is one that is sensitive to broader economic conditions, such as inflation, and fluctuates in correlation with the economic cycle. The intensity of the swings in the industry often grows with the amplitude of the cycle, meaning the peaks and troughs of the cycle's movements become more pronounced. Consumers may gain more confidence and spend more during a boom period, while recessions tend to put a halt to growth.

The cyclicality of businesses within a given sector is influenced by the profitability of products, services, and the cost of inputs. In a growing economy businesses generally have fewer concerns. However, in a recession, reduced demand and cost-cutting may have a drastic effect on the performance of a business operating in the cyclical industry.

Cyclical industries typically involve companies whose businesses are closely tied to the business cycle. Companies in cyclical industries may be adversely affected by economic changes, as can their employees. Industries highly dependent on consumer spending such as retail, transportation, and leisure services, are especially vulnerable during an economic downturn as consumers become more cautious with their spending.

Manufacturing is another cyclical industry. The industry produces items such as automobiles and appliances, which people may not need to purchase during economic downturns. When customers become less willing to purchase these goods, manufacturers are affected, leading to layoffs and fewer production output. On the other hand, during times of economic prosperity, manufacturers are able to reach a larger customer base and enjoy greater profits.

Energy and goods related to living is another category of cyclical industries. This includes housing and construction, which is an industry with a great deal of cyclicality. The high cost of building and developing construction projects makes it highly sensitive to changes in the economy. When the economy is booming, companies in this sector tend to benefit, as they have more customers and are able to secure financing more easily. However, if the economy falls into a recession, the sales of housing and building materials decrease and the industry faces a number of challenges.

The cyclical nature of the industry has a major impact on the entire economy. When the industry performs poorly, other businesses start to suffer, as fewer people are able to purchase goods and services and the labor market tightens. This, in turn, leads to lower wages for employees and decreased profits for companies. As such, instability in cyclical industries can have severe implications for the overall macroeconomic landscape.

Glossary Index