What is Cyclical Industry?
672 reads · Last updated: December 5, 2024
A cyclical industry is a type of industry that is sensitive to the business cycle, such that revenues generally are higher in periods of economic prosperity and expansion and are lower in periods of economic downturn and contraction. Companies in cyclical industries can deal with this type of volatility by implementing employee layoffs and cuts to compensate during bad times and paying bonuses and hiring en masse in good times.
Definition
Cyclical industries are those that are sensitive to changes in the economic cycle. These industries typically see higher revenues during periods of economic expansion and prosperity, and lower revenues during economic downturns and contractions. Common cyclical industries include automotive, construction, tourism, and luxury goods.
Origin
The concept of cyclical industries emerged with the development of industrialization and market economies. Economists in the 19th century began to notice that certain industries' performance was closely linked to economic cycles, prompting further study into economic cycle theories.
Categories and Features
Cyclical industries can be categorized into durable goods industries (such as automobiles and appliances) and non-durable goods industries (such as clothing and tourism). These industries are characterized by their sensitivity to changes in consumer spending, typically performing well during economic expansions and poorly during recessions. Their advantage lies in high profitability during economic upturns, but the disadvantage is the high risk during downturns.
Case Studies
A typical example is the automotive industry. During the 2008 financial crisis, many automakers like General Motors and Ford experienced significant sales declines, leading to layoffs and plant closures. However, as the economy recovered, these companies regained market share through innovation and market expansion. Another example is the tourism industry, which faced a downturn during the COVID-19 pandemic in 2020, but gradually recovered in 2021 and 2022 as vaccinations increased and travel restrictions eased.
Common Issues
Investors often face challenges in predicting changes in economic cycles and managing risks during downturns when investing in cyclical industries. A common misconception is that all cyclical industries perform poorly during recessions; in reality, some companies can maintain competitiveness through diversification and innovation even in economic downturns.
