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ECO: 2) Understanding Business cycles - Coggle Diagram
ECO: 2) Understanding Business cycles
Describe the business cycle and its phases
Expansion
Inventory-sales ratios
are most likely to decrease because of unexpected increases in sales.
the period of increasing economic activity
Peak
the point of maximum economic activity before a downturn, marked by
full/over-utilized capacity
tight labor markets
accelerating inflation
heavy debt-financed capital expenditure
Contraction or recession
the period of declining economic activity following the peak
Trough
the low point of the cycle, where economic activity bottoms out before turning back into expansion
Growth Rate Cycle
Describe credit cycles
Labor market dynamics
Labor hoarding
Firms keep staff on payroll early in a downturn (rehiring is costly). Productivity dips early, then spikes near the trough once output recovers before headcount does.
Labor market tightening
as an expansion matures, the supply of available qualified workers shrinks (since firms have already hired the best-available talent), making it progressively harder to find skilled labor
Lean production
Firms hold minimal inventory, staff, and capital slack; less cushion means faster hiring/production swings when demand shifts.
At the end of a recession, firms will run “lean production” to generate maximum output with the fewest number of workers
Resource use across sectors
Consumer spending
Durable goods
nondurable goods
services
Housing sector activity
Mortgage rates
housing costs relative to income
speculative activity
demographic factors
External trade sector activity
Labor / physical capital
How firms react to fluctuations in business activity.
easy, low-commitment first move
Aging of capital stock:
Instead of selling anything, firms simply stop maintaining what they already have as intensively — deferring routine maintenance
Inventory-sales ratio
Inventory / sales
Falls early in expansion (sales outrun restocking)
normalizes or rises later as production catches up
Which sectors depend on borrowed money to function?
Construction
describe how resource use, consumer and business activity, housing sector activity, and external trade sector activity vary over the business cycle and describe their measurement using economic indicators
3 Economic Indicators
*table on notion
leading indicators
:
move first (they anticipate the turn)
Average weekly hours, manufacturing
Firms adjust hours before headcount, so this moves before employment/output.
Building permits
Initial unemployment claims
Yield spread (10yr vs short-term rate)
Narrowing/inverting signals bond markets expect slower growth ahead.
Stock market index (e.g. S&P 500)
Manufacturing new orders
Coincident indicators
:
move next (they confirm it's happening now)
Industrial production index
Aggregate real personal income
Real GDP
lagging indicators
:
move last (they confirm it after the fact)
Unit labor costs
Average bank prime lending rate
Ratio of consumer installment debt to income
Rises after income rises — people borrow more once they feel confident income gains are real.
Average duration of unemployment
Lagging unemployment rate
" means the unemployment rate stays high (or even keeps rising) for a while even after the recovery has already started
Services inflation
Nowcasting
= using available data (which is often incomplete or reported with a lag) to estimate the present state of the economy right now, before official data catches up