As the volume of production - is the main index of aggregate economic activity, the peaks and troughs in the dynamics of change in the volume of production tend to coincide with the peaks and troughs changes of aggregate economic activity. Therefore, the volume of production is coincident and pro-cyclical index. Fig. 3.5 shows the change in the index of industrial production in the United States since 1947. This is index of output in manufacturing, mining and utilities. Vertical lines P and T in Fig. 3.5 indicate the dates of peaks and troughs of the business cycle according to NBER (see tab. 3.1) Turning points of changes in industrial production closely correspond to the turning points in the business cycle. Although the production of virtually all departments increases in the phase of expansion and decreases in recession, in some departments sensitivity of manufacture to the phase of business cycle is greater than in other. Departments producing long life goods, long term consumer products or capital goods (machine tools, computers, industrial machinery and equipment) - are more responsive to changes in business activity. In contrast, the departments producing the goods with a short shelf life (food, paper goods) or services (education, insurance) are less sensitive to fluctuations in the business cycle. As it had been noted earlier in researches of Stoke and Watson.
1. Business Cycles, Indicators, and Forecasting, edited by James H. Stock and Mark W. Watson, University of Chicago Press for the NBER, 1993.
production is a broad gauge of output in manufacturing, mining and utilities, is pro-cyclical and matching. The peaks and troughs of the business cycle are shown by vertical lines P and T. The shaded areas represent recession.
For the all costs components, as for all types of production, duration is a critical determinant of their sensitivity to the business cycle. Figure 8.5 shows the evolution of the cyclic changes of goods consumption, objects of long term using, service consumption, consumer spending on durable goods and investments. Investments perform commodity expenditures, mainly of long term use, that at their own right the most procyclical, dynamics of consumption and investment generally, coincides with the dynamics of the business cycle, although the particular components of fixed capital behave somewhat differently.1
One of the expenditure components, which follows its own rules, are investments in stocks or changes in commodities funds of business. Although the average investments in stocks are quite of a small portion (about 1%) of the total cost, the sharp decline of investments in commodity stocks took a big share of general expenditures reductions in some recessions, the most notable examples are the recessions of 1973-1975, 1981-1982, and 2001.
Fig. 3.6 The dynamics of the cyclic changes in consumption and investment
SOURCE: FRED database of the Federal Reserve Bank of St. Louis, research.stlouisfed.org!
And consumption and investment are pro-cyclical. However, investment is more sensitive than consumption, to the business cycle, reflecting the fact that the durable goods used by a large part of the investment costs. Similarly, expenditure on consumer durables are more sensitive to the business cycle than consumption goods, non-durable goods, or services.