© 2000 John Petroff
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© 2000 John Petroff |
4)- Counter-cyclical industries
Those are industries for which the demand is either not correlated with the business cycle. The demand for their products is not much affected by availability of current income, but by other personal, social or economic factors. One can find medical care and housing in this grouping, as well as industries linked to new household formations, in addition to gold mining companies mentioned as having a defensive stock in Section A-3d. Higher education is also said to be counter cyclical because people who do not find jobs in recessions put their free time to good use by acquiring new skills that will open new and better job opportunities. Other aspects of business cycle (i.e. behavior of prices, availability of labor, cost of capital) nevertheless do influence these activities. Graph G-14.15 for medical care real growth rate suggests the lack of correlation with the business cycle, except in serious disruptions such as the great depression, and an OLS regression confirms that with a R2 of 0.16.
Private housing construction used to be classified as counter cyclical, but in the recent past it has turn slightly cyclical. Private housing construction has two major demand determinants: household formation and mortgage rates. There is some influence of the business cycle on household formation in that couples may be reluctant to marry if one anticipates losing his/her job; but this is rather minor because only a tiny proportion (less than 5%) of those employed actually have lost their jobs during recent recessions. Thus, the household formation is more of a long term trend. It is also very much a regional trend affected by population migration. The second major determinant are mortgage rates because they determine the size of mortgage installment payments that will to be paid over many years. Their main components are inflation if the mortgage rate is a fixed rate, and investment demand if the mortgage rate is a variable rate. As indicated earlier, variable rates are always lower, but home buyers prefer fixed rates because fixed rates take away the uncertainty of installment associated with variable rates. Both inflation rate and investment demand are tied to the business cycle: going up in expansion and down in recession. Only in the late 1970's and early 1980' was the inflation rate high during recessions. Since then, the historical pattern of lower inflation in recession has returned. Thus, from the demand side of the market, there will be more demand for housing in period of recession when mortgage rate are lower.
For housing construction, there is (or used to be) also a cost factor: cost of materials (such as steel, lumber and plastics) are lower in recession because cyclical industries do not bid their prices up. Also there is more labor which is released by the cyclical industries. Together these savings of cost of construction justify lower housing prices. Thus, because of demand as well as supply factors, housing output could be expected to rise in recession and decline in business expansion. This seems to be partly born out by Graph G-14.16 below showing the rate of change of housing, only partly indeed, because housing has recently become a little more cyclical. An OLS regression on the data in the graph gives an R2 of only 0.10 suggesting no correlation withe the business cycle.
Recently (i.e. in the past 20 years), housing construction has become cyclical because fluctuations in interest rates and labor markets have diminished, and because purchases have become more influenced by available disposable income which is strongly cyclical. But, the counter-cyclical pattern of housing construction may possibly return.
Housing influences all the industries that appoint new homes with carpets, furniture, appliances and other indoor and outdoor conveniences. One would assume that the behavior of these industries should lag closely housing starts. But these purchases are postponable and are therefore more cyclical.
See review questions Q-14D4.1 through Q-14D4.3.
See research assignment R-14D4.1.
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