Lesson 7 - Business Cycles and Economic Indicators

Entrepreneurs are very sensitive to the environment. Naturally, the ups and downs of the economy will be their top concerns. Business cycle is the concept used to understand these changes. There are major economic indicators associated with reading the the business cycle, which allows entrepreneurs to see how others track major shocks ahead so they can take precaution to adjust their investment and production decisions.

Business cycle is consisted of four phases:
• Contraction
• Trough
• Expansion
• Peak

The contraction phase involves a period where economic activity begins to slow. If the contraction is intense enough, it will lead to a trough. When the trough reaches its bottom, it will start to take up again, bringing about an expansion phase. During this phase, economic activity will pick up again until it reaches the peak, beginning another round of downturn. A recession will occur if the downturn is severe enough.

In general, the expansions and contractions of the economy will affect many industries and companies. Economic indicators are widely available to help read the trends. However, even experts disagree on the timing of these so-called leading indicators. There are many other indicators, such as housing starts, interest rates and price indices, that economists look to help tracking and forecasting changes in business cycles.

There are three types of economic indicators: leading, lagging, and coincident. The leading indicators signal future events in the economy, whereas the coincident indicators signal concurrent economic events. The lagging indicators happen after the economic events have already taken place. In United States, the National Bureau of Research (NBER) uses employment rates, industrial production, personal income levels, and manufacturing and trade sales to track business cycles on a monthly basis. Consumer sentiment and future purchasing decisions as reflected in consumer spending and purchase manager indices can tell a lot about the general outlook of the economy. Stock market index is also another leading indicator.

Entrepreneurs would want to ensure their long-term capital investment decision and short-term production decision be informed by knowledge of business cycle and the use of economic indicators. They want to know when it is advantageous to cut down on inventory and hiring and when it is advantageous to ramp up production capacity and hire more people.

Major points to recap

a. Business cycle is the concept used to describe the ups and downs of economic activities.
b. Economic cycle is consisted of four phases.
c. There are three types of economic indicators: leading, lagging, and coincident.
d. In United States, the National Bureau of Research (NBER) uses employment rates, industrial production, personal income levels, and manufacturing and trade sales to track business cycles on a monthly basis.
e. Entrepreneurs would want to ensure their long-term capital investment decision and short-term production decision be informed by knowledge of business cycle and the use of economic indicators.

Questions:
a. Can the visitor arrival statistics reported by the Hong Kong Tourism Board be used as one of the indicators of business outlook in a business cycle?
b. What kind of business will be affected by the downturn and increases in the visitor arrival counts?