Understanding Cyclical Industries: Definition, Traits, and Real-World Examples

What Is a Cyclical Industry?

A cyclical industry is very sensitive to economic fluctuations. Companies in these industries often grow and hire more workers when the economy does well, and may slow down and cut workers during economic downturns. This is different from non-cyclical industries, which stay fairly stable regardless of how the economy is doing. Cyclical industries include airlines, car makers, and other consumer goods companies that people buy more of when times are good.

How Cyclical Industries Respond to Economic Changes

Cyclical industries are affected by business cycles, making consumers prioritize and cut non-essential costs during downturns. Therefore, industries that focus on nonessential products face the biggest risk of revenue loss when economic contraction takes hold. In contrast, utilities weather economic downturns better because people still need to pay their utility bills.

Navigating the Phases of 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. More employment and growing investments give people more discretionary income, and they spend more freely. 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 drops during contractions due to higher unemployment and lower productivity. Recessions happen during contraction phases, but not all contractions lead to recessions. In the United States, two consecutive quarterly declines in gross domestic product (GDP) represent the most common criteria of an economic recession. The trough is the final phase of the business cycle. This phase is where the economy bottoms out before starting the cycle anew and commencing another contractionary phase.

Identifying Key Cyclical Industries and Their Impact

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 people buy with discretionary income, also is highly sensitive to the business cycle, because discretionary expenses are easier to cut from a consumer's budget during hard times rather 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 fiscally conservative vacations closer to home (if they go at all) and avoid expensive air travel.

The Bottom Line

A cyclical industry is a business that goes up and down with the economy, making more money when the economy is strong and less when it slows down. These industries may face challenges like layoffs and lower sales when times are tough. This is different from countercyclical industries, like utilities or healthcare, which are stable even during downturns. Examples of cyclical industries include car makers and consumer goods companies that people buy more of when they have extra money. Understanding the phases of the business cycle—expansion, peak, contraction, and trough—helps investors and businesses see how these industries might perform.