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The business-cycle

in depth…
Summary
In this slideshow we look at how the
economy (production, employment,
sentiment, spending) vary throughout the
8 business cycle stages.
We then present our unique 8-stage
economy, asset, firm and personal cycles.
Enjoy and share!!
The economy
Commodities
Private Debt
Consumer
Spending

Interest
Rates
Business
Private Wealth Inventory
Consumer Ind. Production
Sentiment & Serv. Activity

Business
Real Income Investment
Employment

11 factors define our simplified economy. The most important are consumer
sentiment, consumer spending; business production/activity, and employment.
The Production Function…
… shows how inputs (labour, capital, materials,
and land) are turned into economic outputs
(goods & services) through firm processes and
technology.
Technology

Employment
Capital ($) Firm
Economic outputs
Processes &
Materials (Goods & Services)
Management
Land
The Production Function…
Output = Productivity x Employment0.7 x Capital0.3
(Productivity is a function of technology, processes, management)

Thus for small changes in productivity and capital,


Output is directly related to Employment

Output ~= Employment0.7
Technology

Employment
Capital ($) Firm
Economic outputs
Processes &
Materials (Goods & Services)
Management
Land
Measuring the economy…
… Gross Domestic Product (GDP) is the total market value of all final
goods & services produced within a country in a given period of time.

Economic growth is measured as the yearly growth in


real GDP (corrected for inflation, e.g. 3 %).

GDP growth (%) =~ Employment growth (%)


Technology

Employment Growth (%pa)


Capital ($) Firm
Economic output growth
Processes &
Materials (%pa Goods & Services)
Management
Land
Output & Employment…
…as per theory, GDP growth closely correlates to
Employment growth, and it is a smoother curve…

Yearly GDP growth (%)

Yearly employment growth (%)


Production & Employment…
…as per theory, production growth closely correlates to
Employment growth, and it is a smoother curve…

Yearly production growth (%)

Yearly employment growth (%)


Production & Employment…
…a 2% change in industrial production equates to a 1%
change in private employment …

Yearly
employment
growth (%)

Yearly production growth (%)


Employment, actual & growth…
…this chart shows employment in actual levels, and in
terms of % change on year prior levels

Yearly employment growth (%) - LHS

Actual Private Employment (000’s) - RHS


We can define key points on the annual employment %
change curve to define 8 points in the business-cycle

3
4 3
2
4

5 5
1

8
6
7
Slowdown Downturn Recovery Expansion Slowdown Downturn
This gives us the 8-stage business cycle as shown below.
Expansion – Slowdown – Downturn – Recovery
3
2 4 Downturn
(winter)
Recovery
1 early late early late 5 (spring) 1
early late early late
Expansion
(summer)
Slowdown
(fall/autumn)
6 8

We can now relate the 8 stages to our simplified economy.


The business-cycle
High consumer sentiment, leads to rising consumer spending,
leading to rising industrial production,
leading to rising employment.

Consumer
Spending

Consumer Ind. Production


Sentiment & Serv. Activity

Employment
The business-cycle
With rising employment, real incomes and wealth rise, debt expands,
sentiment and spending increase, leading to rising production,
employment, commodity prices, inventories and business investment.

Commodities
Private Debt
Consumer
Spending

Interest
Rates
Business
Private Wealth Inventory
Consumer Ind. Production
Sentiment & Serv. Activity

Business
Real Income Investment
Employment
The business-cycle
Looking at the major elements in turn.

Consumer
Spending

Consumer Ind. Production


Sentiment & Serv. Activity

Employment
The business-cycle via consumer sentiment

Slowdown Downturn Recovery Expansion Slowdown Downturn

Dark area
indicates recession
The business-cycle via real private consumption growth

Slowdown Downturn Recovery Expansion Slowdown Downturn

Dark area
indicates recession
The business-cycle via industrial production growth

Slowdown Downturn Recovery Expansion Slowdown Downturn

Dark area
indicates recession
The business-cycle via industrial production level

Slowdown Downturn Recovery Expansion Slowdown Downturn

Dark area
indicates recession
The business-cycle via Total Capacity Utilisation

Slowdown Downturn Recovery Expansion Slowdown Downturn

Dark area
indicates recession
The business-cycle via PMI Composite Index

Slowdown Downturn Recovery Expansion Slowdown Downturn

Dark area
indicates recession
The business-cycle via private employment growth

3
4 3
2
4

5 5
1

8
6
7
Slowdown Downturn Recovery Expansion Slowdown Downturn
The business-cycle via private employment level

Slowdown Downturn Recovery Expansion Slowdown Downturn


3
4 3
2
4

5 1 5

6 8
7
Dark area
indicates recession
The business-cycle via the unemployment rate

Slowdown Downturn Recovery Expansion Slowdown Downturn

Dark area
indicates recession
The business-cycle
Looking at the secondary elements in turn.

Commodities
Private Debt
Consumer
Spending

Interest
Rates
Business
Private Wealth Inventory
Consumer Ind. Production
Sentiment & Serv. Activity

Business
Real Income Investment
Employment
The business-cycle via commodities price change (oil)

Slowdown Downturn Recovery Expansion Slowdown Downturn

Dark area
indicates recession
The business-cycle via business inventory

Slowdown Downturn Recovery Expansion Slowdown Downturn

Dark area
indicates recession
The business-cycle via fixed private investment growth

Slowdown Downturn Recovery Expansion Slowdown Downturn

Dark area
indicates recession
The business-cycle via new capital goods order growth

Slowdown Downturn Recovery Expansion Slowdown Downturn

Dark area
indicates recession
The business-cycle via real earnings

Slowdown Downturn Recovery Expansion Slowdown Downturn

Dark area
indicates recession
The business-cycle via consumer debt growth

Slowdown Downturn Recovery Expansion Slowdown Downturn

Dark area
indicates recession

… not a strong link, other long-term factors at play …


The business-cycle
Other economic indicators:
Official Federal (Central Bank) Funds Rate, 10 year Treasury Bond Yield,
OECD Composite Leading Indicator, OECD Industrial Production

Commodities
Private Debt
Consumer
Spending

Interest
Rates
Business
Private Wealth Inventory
Consumer Ind. Production
Sentiment & Serv. Activity

Business
Real Income Investment
Employment
The business-cycle via Fed/central bank funds rate

Slowdown Downturn Recovery Expansion Slowdown Downturn

Dark area
indicates recession
The business-cycle via 10yr Treasury yield

Slowdown Downturn Recovery Expansion Slowdown Downturn

Dark area
indicates recession
The business-cycle overview
Expansion Slowdown Downturn Recovery

Employment
Positive and increasing Positive and decreasing Negative and decreasing Negative and increasing
Growth
Employment Rising more slowly to Falling quickly from peak Falling slowly to bottom
Rising strongly
Level peak then initial fall then more slowly then rising slowly

Unemployment Slow decrease to cycle Rapid rise initially, then Continued slow rise to
Decreasing steadily
Rate low then rising slower steady rise peak then steady decline

Industrial Rises strongly to peak the Falls to bottom then begins


Continues to rise strongly Continues to rise strongly
Production begins to fall rising

Total Capacity Stagnates at high level Falls away rapidly to cycle


Rises at faster pace Rises slowly
Utilisation then begins to fall low before recovering

Growth in Real Stagnates at high level Falls away rapidly to cycle


Rises at faster pace Rises slowly
Consumption then begins to fall low before recovering

Consumer Rises and stabilises at Begins to fall from cycle Stagnates at low before Continues rising towards
Sentiment cycle high high to cycle low beginning recovery cycle high

Durable Goods Slowly rising from Decreasing quickly from Rapid rise to near cycle
Rising from bottom
New Orders strength to cycle peak cycle peak high

OECD Composite CLI steady (rising perhaps) Falling steadily to below Continued fall into cycle Continued rise from
Leading Indicator above 100, with late fall 100 low, then late rise below to above 100
Key Point Summary
Key point #1: Output is proportional to employment

Key point #2: GDP growth measures the economy

Key point #3: Employment growth follows GDP growth

Key point #4: Employment growth is smooth, available


monthly, reflects business decisions & has an
impact on consumer sentiment
Key point #5: Monitor employment growth
Key point #6: Understand where in the 8 stage business
cycle we are
BCM 8 Stage Economic Cycle
BCM 8 Stage Asset Cycle
BCM 8 Stage Firm Cycle
BCM 8 Stage Personal Cycle
understand, monitor & exploit…

Happiness Lifestyle Profits Career

…the business-cycle
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