# 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.

### Key Takeaways

*   Cyclical industries are sensitive to the business cycle, with higher revenues during economic growth and lower revenues during downturns.
*   Companies in cyclical industries adjust to volatility by downsizing during downturns and expanding during prosperous times.  
    
*   The business cycle consists of four phases: expansion, peak, contraction, and trough, impacting discretionary income and spending habits.  
    
*   Examples of cyclical industries include those producing durable goods and consumer discretionary sectors sensitive to changes in consumer spending.  
    
*   Countercyclical industries, such as utilities and healthcare, are less affected by economic downturns, maintaining stable demand.

## 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](https://www.investopedia.com/terms/b/businesscycle.asp) 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)](https://www.investopedia.com/terms/g/gdp.asp) 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.

> **Important**
>
> The cyclicality of an industry can be measured in terms of its correlation with a broad market index. A strong correlation means that an industry is highly cyclical; a weak or negative correlation is a sign that it is countercyclical.

## Identifying Key Cyclical Industries and Their Impact

Industries involved in the production of [durable goods](https://www.investopedia.com/terms/d/durables.asp), 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](https://www.investopedia.com/terms/d/disposableincome.asp), 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.

## What Is a Countercyclical Industry?

Countercyclical industries are those that are less sensitive to changes in the wider economic environment. These companies may perform better than other businesses during a downturn, or they may even see an increase in profits. Utilities, healthcare businesses, and consumer staples are considered countercyclical, in that consumers do not reduce their consumption during times of hardship.

## What Are Cyclical Stocks?

[Cyclical stocks](https://www.investopedia.com/articles/00/082800.asp) are stocks that are heavily correlated with the fluctuations in the wider economy. These stocks see their values rise during periods of prosperity, and fall during recessions. Automobiles, new construction, and discretionary goods are typical examples of cyclical industries.

## What Makes a Company Cyclical?

Cyclical companies tend to be in industries that are highly sensitive to interest rate fluctuations or changes in consumer discretionary spending. An increase in unemployment or interest rates can cause a cash crunch in these industries, as the reduced spending makes it more difficult for them to maintain profit margins.

## 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.  

> **Article Sources**
>
> 1.  SoFi. "[What Are Countercyclical Stocks?](https://www.sofi.com/learn/content/countercyclical-stocks-and-examples/)"