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Subject 3. The Impact of the Business Cycle PDF Download

Key economic variables change throughout the business cycle.

Unemployment increases during business cycle recessions and decreases during business cycle expansions (recoveries). However, employment levels follow the cycle with a delay as companies initially use overtime before hiring after the onset of recovery and then reduce overtime before reducing employment as the economy passes its peak and enters contraction.

Capital spending is highly sensitive to changes in economic activity, and fluctuates with the business cycle.

The size of inventory is small relative to the size of the economy, but inventories can fluctuate dramatically over the business cycle. Inventory-sales ratio measures the inventory available for sale to the level of sales. Analysts pay attention to inventories to gauge the position of the economy in the cycle.

Consumer spending, the largest component of output, follows cyclical patterns as workers make decisions based their levels of income, income growth, and employment outlook. For example, an increase in durable spending may be an early indication of economic recovery. Consumer spending is however less cyclical than investment spending though.

The housing sector is very sensitive to interest rates. It is also affected by the rate of family formation and expectation of housing price increases.

Imports respond to the domestic cycle. It will increase if the domestic economy is in the expansion stage, and decline in the contraction stage. Exports depend more on cycles of foreign economies. The currency exchange rate plays an important role in this sector.

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