© 2000 John Petroff
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© 2000 John Petroff |
These are consumer products and services. Some are basic staple goods and others are luxury and leisure items. As already indicated in Section A-3, the demand for leisure related items is closely tied to consumers' income, and their fear of losing their jobs. When attitudes turn to pessimism at the beginning of a slow down, demand shrinks: no one wants to go on vacation if there is even a remote possibility that one would get laid off. When optimism returns, companies in these industries can barely keep up with demand. While demand is unstable almost as much as in the durables industry type, profit is not because these industries are less leveraged: there is no need of large fixed assets nor heavy debt to be served, the overhead is not large, even the size of the staff can be fine tuned with temporary help, and the size of fixed assets with leasing. It is essential that a company does not cut down permanently its capacity, or sales opportunity will be missed when demand returns, and the company risks losing its market share and more. In those industries with its high sensitivity to income, such as international air travel shown in Graph G-14.13, the amplitude of the business cycle is amplified: the industry is extremely cyclical.
Profits of airline companies are so unstable that it is not unusual for airline companies to find their net worth turn negative in an economic slow down and remain such for several years until people start going of vacations again in economic prosperity. Few companies in other industries could tolerate such precarious outlook.
Graph G-14.14 shows the entire transportation sector which also demonstrates a high correlation with business cycles (except for war periods) but to a lesser degree than the airline industry alone.
An OLS regression of data used in Graph G-14.14 for years 1949 through 1997 gives an R2 of 0.41 and a tb statistic of 6.83, which points to a strong correlation between industry growth and business cycle. The lesson is clear, for all such industries, correct forecast of recession and expansion is absolutely vital.
See review questions Q-14D3.1 through Q-14D3.4.
See research assignment R-14D3.1.
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