Business-cycle Theory In Depth

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

Private Wealth

Real Income

Consumer Sentiment

Ind. Production & Serv. Activity

Employment

Business Inventory

Business Investment

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 ($) Materials Land

Firm Processes & Management

Economic outputs (Goods & Services)

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 ($) Materials Land

Firm Processes & Management

Economic outputs (Goods & Services)

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 ($) Materials Land

Firm Processes & Management

Economic output growth (%pa Goods & Services)

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

2

3 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)

1

early

late

early late

(summer)

(spring)

5

early

Expansion

Recovery early

late

1

late

Slowdown (fall/autumn) 8

6 7

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 Sentiment

Ind. Production & 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

Private Wealth

Real Income

Consumer Sentiment

Ind. Production & Serv. Activity

Employment

Business Inventory

Business Investment

The business-cycle Looking at the major elements in turn.

Consumer Spending

Consumer Sentiment

Ind. Production & Serv. Activity

Employment

The business-cycle via consumer sentiment

Slowdown

Dark area indicates recession

Downturn Recovery

Expansion

Slowdown

Downturn

The business-cycle via real private consumption growth

Slowdown

Dark area indicates recession

Downturn Recovery

Expansion

Slowdown

Downturn

The business-cycle via industrial production growth

Slowdown

Dark area indicates recession

Downturn Recovery

Expansion

Slowdown

Downturn

The business-cycle via industrial production level

Slowdown

Dark area indicates recession

Downturn Recovery

Expansion

Slowdown

Downturn

The business-cycle via Total Capacity Utilisation

Slowdown

Dark area indicates recession

Downturn Recovery

Expansion

Slowdown

Downturn

The business-cycle via PMI Composite Index

Slowdown

Dark area indicates recession

Downturn Recovery

Expansion

Slowdown

Downturn

The business-cycle via private employment growth

3 4

2

3 4

5

5 1 8

6 7 Slowdown

Downturn Recovery

Expansion

Slowdown

Downturn

The business-cycle via private employment level

3

Slowdown

Downturn Recovery

Expansion

Downturn

3

4

2

1

5 6

8 7

Dark area indicates recession

Slowdown

4

5

The business-cycle via the unemployment rate

Slowdown

Dark area indicates recession

Downturn Recovery

Expansion

Slowdown

Downturn

The business-cycle Looking at the secondary elements in turn.

Commodities

Private Debt

Consumer Spending Interest Rates

Private Wealth

Real Income

Consumer Sentiment

Ind. Production & Serv. Activity

Employment

Business Inventory

Business Investment

The business-cycle via commodities price change (oil)

Slowdown

Dark area indicates recession

Downturn Recovery

Expansion

Slowdown

Downturn

The business-cycle via business inventory

Slowdown

Dark area indicates recession

Downturn Recovery

Expansion

Slowdown

Downturn

The business-cycle via fixed private investment growth

Slowdown

Dark area indicates recession

Downturn Recovery

Expansion

Slowdown

Downturn

The business-cycle via new capital goods order growth

Slowdown

Dark area indicates recession

Downturn Recovery

Expansion

Slowdown

Downturn

The business-cycle via real earnings

Slowdown

Dark area indicates recession

Downturn Recovery

Expansion

Slowdown

Downturn

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

Private Wealth

Real Income

Consumer Sentiment

Ind. Production & Serv. Activity

Employment

Business Inventory

Business Investment

The business-cycle via Fed/central bank funds rate

Slowdown

Dark area indicates recession

Downturn Recovery

Expansion

Slowdown

Downturn

The business-cycle via 10yr Treasury yield

Slowdown

Dark area indicates recession

Downturn Recovery

Expansion

Slowdown

Downturn

The business-cycle overview Expansion

Slowdown

Downturn

Recovery

Employment Growth

Positive and increasing

Positive and decreasing

Negative and decreasing

Negative and increasing

Employment Level

Rising strongly

Rising more slowly to peak then initial fall

Falling quickly from peak then more slowly

Falling slowly to bottom then rising slowly

Decreasing steadily

Slow decrease to cycle low then rising

Rapid rise initially, then slower steady rise

Continued slow rise to peak then steady decline

Unemployment Rate Industrial Production

Continues to rise strongly

Rises strongly to peak the Falls to bottom then begins Continues to rise strongly begins to fall rising

Total Capacity Utilisation

Rises at faster pace

Stagnates at high level then begins to fall

Falls away rapidly to cycle low before recovering

Rises slowly

Growth in Real Consumption

Rises at faster pace

Stagnates at high level then begins to fall

Falls away rapidly to cycle low before recovering

Rises slowly

Consumer Sentiment

Rises and stabilises at cycle high

Begins to fall from cycle high to cycle low

Stagnates at low before beginning recovery

Continues rising towards cycle high

Durable Goods New Orders

Slowly rising from strength to cycle peak

Decreasing quickly from cycle peak

Rising from bottom

Rapid rise to near cycle high

Continued fall into cycle low, then late rise

Continued rise from below to above 100

OECD Composite CLI steady (rising perhaps) Falling steadily to below 100 Leading Indicator above 100, with late fall

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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