Cyclical Nature of the Transportation Industry
Name
Institution
Q.1
Industries respond in various ways to the fluctuations of the business cycles of the global economy. Some industries are very susceptible to economic trends, whereas others are relatively immune to the trends. A cyclical firm is that which usually is sensitive to the cycle of a business. For instance, the revenues are typically higher in the seasons of economic prosperity and growth and usually lower in seasons of economic contraction and downturn (SCOTT, 2020). Therefore, the transportation industry is believed to be cyclical because it is influenced mainly by the cycles of business and it heavily relies on the economic conditions of a nation, particularly the distortion in interest rates. Transportation firms in most nations are usually engaged in business during economic prosperity and faces adverse effects during the low economy season. For instance, it entails the entry of various businesses and persons’ in periods when the business is booming with the growth in the economy, and the need for transportation of goods and services is high.
Cyclical industries usually deal with this kind of volatility via the implementation of the layoffs of employees and cuts to compensate during the downturns, and offering bonuses and hiring in mass during economic prosperity. Additionally, due to the sensitive nature of the cycles of business, during economic contractions, the consumers prioritize expenses and potentially correlate some costs that are not important (SCOTT, 2020). For instance, firms that deal majorly on non-essential products generally face a huge risk of loss of revenue in periods of economic contraction. On the other hand, firms like the ones for utilities generally weather to economic storms much better because people still find a way to settle their light bill no matter how bad the period is.
Recent studies have shown that most industries that are cyclical are the ones normally involved in the production of durable goods like heavy equipment, and raw materials (SCOTT, 2020). The consumer discretionary goods and services, which usually majors on products and services that individuals purchases with discretionary income operate hands in hand with the cycle of business as well. It is because the expenses of the discretionary are not difficult to cut from a client’s budget during economic downturns.
A perfect example of the cyclical nature in the transportation firm is the airline industry that is subjected to high and low periods depending on a country’s economic growth. During good economic seasons, individuals have more disposable income, thus are more willing to break for vacations and utilize air travel. On the other hand, during an economic contraction, individuals are cautious on spending and they are mostly seen taking more fiscally conservative vacations next to their homes to evade expensive spending (Kalkine, 2019). Moreover, the automobile industry is also cyclical. Typically, people buy cars during economic prosperity times whereas during low economic seasons, people tend to hold off on purchasing cars. Other industries that are also cyclical are resources, apparel, and furniture retail, and media and entertainment industries. They experience a boom in business during good times, but suffer adverse effects during economic contraction periods.
Q.2
The economic downturns or recessions of the economy have led to a reduction in demands that has led to several employees losing their jobs as the production level reduces. Since it is very difficult for the transport industry to cut down on the cost and capacity within a short time and it is also complex to cut down on such items, transport companies can take certain steps to avoid the adverse effects of economic downturns. First and foremost, transportation companies can resort to positioning their companies in multiple geographies and markets (Pearce & Michael, 2006). Having positions in multiple regions by a company has proven to help companies reduce the variations in cash flow caused by the cyclical nature of an industry. For instance, during the recession in 1991-1992, it is the distribution of its companies across the nation that helped KeyCorp in New York to maintain its corporate profitability at levels above its rivalries. Secondly, transport companies can continue promoting their organization’s products and services during a recession. Downturns are claimed to increase the returns on marketing duties as the advertising costs are cheaper. The step paid off during the 2001 recession where Dixieline Lumber (a 10-unit San Diego chain) took an initiative in using two marketing initiatives that assisted the company to increase its sales by 9 percent.
Besides, unemployment is also an adverse effect caused by economic downturns when the cyclical industries experience failure in business during a recession. To mitigate such effects, the policymakers within the companies should major on expanding output which can be achieved by enhancing the demand via the expansion monetary and fiscal policies (WALTERS, 2020). The expansionary fiscal policy has managed the employment and output by decreasing taxation and increasing government spending. According to John Maynard Keynes, a decrease in taxation leads to higher levels of disposable income, thus increasing consumption. Moreover, an increase in consumption will realize higher gross domestic product (GDP) and higher aggregate demand. Besides, transportation companies can also use the expansionary monetary policy to reduce the adverse effects during a recession. The policy will aid in increasing the growth of the economy and the aggregate demand by cutting interest rates. Studies have shown that a lower interest implies a lower cost of borrowing, thus individuals will spend a lot of money and invest more. Therefore, it will increase the GDP and the aggregate demand, thus decrease in unemployment during a recession. Finally, when the interest rates are lower, the exchange rates are lower as well, and the exports of any economy become more competitive.
References
Kalkine, T. (2019). A Quick Review of Cyclical Industry. Kalkinemedia.com. Retrieved 25 November 2020, from https://kalkinemedia.com/au/blog/a-quick-review-of-cyclical-industry.
Pearce II, J. A., & Michael, S. C. (2006). Strategies to prevent economic recessions from causing business failure. Business Horizons, 49(3), 201-209.
SCOTT, G. (2020). Cyclical Industry. Investopedia. Retrieved 25 November 2020, from https://www.investopedia.com/terms/c/cyclical_industry.asp.
WALTERS, T. (2020). What Can Policymakers Do to Decrease Cyclical Unemployment?. Investopedia. Retrieved 25 November 2020, from https://www.investopedia.com/ask/answers/030415/what-can-policymakers-do-decrease-cyclical-unemployment.asp.