Loading the player...

What is a 'Cyclical Industry'

A cyclical industry is a type of industry that is sensitive to the business cycle, such that revenues are generally higher in periods of economic prosperity and expansion and lower in periods of economic downturn and contraction. Companies in cyclical industries can deal with this type of volatility by implementing layoffs and cuts to compensate during bad times and paying bonuses and hiring en masse in good times.

BREAKING DOWN 'Cyclical Industry'

Cyclical industry are sensitive to business cycles, so downturns in the cycle force consumers to prioritize expenses and potentially cut out some that are not essential. Therefore, industries that focus on nonessential products face the biggest risk of revenue loss when economic contraction takes hold. By contrast, industries such as utilities tend to weather economic storms much better, as no matter how bad times are, most people find a way to pay their light bill.

The Business Cycle

The business cycle is comprised of four discrete phases. During the expansionary phase, productivity grows, unemployment shrinks and stock markets tend to rise. Because more people are employed during this phase and their portfolios are growing, they have more discretionary income and are less reticent about spending it. The peak follows the expansionary phase. At this point, the economy has reached the end of expansion and subsequently begins its contractionary phase.

Discretionary income falls during contraction, as more people are unemployed and productivity is lower. Recessions occur during the contractionary phase, though not all periods of contraction result in recessions. In the United States, two consecutive quarters of gross domestic product (GDP) decline represent the most common criteria to declare an official recession. The final phase of the business cycle is the trough. This phase is where the economy bottoms out before starting the cycle anew and commencing another contractionary phase.

Examples of Cyclical Industries

Industries involved in the production of durable goods, such as raw materials and heavy equipment, tend to be cyclical. Consumer discretionary goods, a sector focused on products and services that consumers purchase with discretionary income, is also highly sensitive to the business cycle, as discretionary expenses are easier to cut from a consumer's budget during hard times than essential costs.

For example, the airline industry is a fairly cyclical industry. In good economic times, people have more disposable income, so they are more willing to take vacations and make use of air travel. Conversely, during bad economic times, people are much more cautious about spending. As a result, they tend to take more conservative vacations closer to home (if they go at all) and avoid expensive air travel.

RELATED TERMS
  1. Industry Life Cycle Analysis

    Industry life cycle analysis is part of fundamental analysis ...
  2. Contraction

    A contraction is a phase of the business cycle when a country's ...
  3. Economic Cycle

    The economic cycle is the ebb and flow of the economy between ...
  4. Peak

    Peak refers to the pinnacle point of economic growth in a business ...
  5. Cyclical Unemployment

    A factor of overall unemployment that relates to the cyclical ...
  6. Trough

    A trough is the stage of the economy's business cycle that marks ...
Related Articles
  1. Investing

    The Ups And Downs Of Investing In Cyclical Stocks

    This strategy can be profitable but only if you know when to dump these stocks.
  2. Trading

    Market Cycles: The Key to Maximum Returns

    You need to understand the various phases of the market cycle to avoid bubbles and make the best investments.
  3. Investing

    Business Cycle Investing: Ratios to Use For Each Cycle

    Examine economic and sector performance over the business cycle to determine which ratios are most important for each phase of the cycle.
  4. Investing

    3 Cyclical Industries To Exploit in 2016

    Learn about the three industries at the down end of their business cycles, and discover how these industries may improve in years to come.
  5. Financial Advisor

    Top 3 Consumer Cyclical Mutual Funds

    Obtain information on, and analysis of, some of the best performing mutual funds that offer exposure to the consumer cyclicals sector.
  6. Investing

    Understanding Market and Full Risk Cycles

    Investor need to understand the four stages the markets tend to experience.
  7. Trading

    The Stock Cycle: What Goes Up Must Come Down

    Stock prices seem random, but there are repeating cycles. Learn to take advantage.
  8. Investing

    Company Survival: Cash Conversion Cycle Is Key

    Find out how to use this figure to analyze a firm's financial condition.
  9. Insights

    Industries that thrive on recession

    Learn where to turn when investing in a bear market.
RELATED FAQS
  1. What happens during the consolidation phase of an investor's life cycle?

    Unlike the accumulation phase – where emphasis is placed on growing wealth – the consolidation phase is a balance between ... Read Answer >>
  2. How does fiscal policy impact the budget deficit?

    Find out how the different uses of fiscal policy impact a government's budget deficit, and the difference between contractionary ... Read Answer >>
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center