Industry research
Cyclical or structural? Separating the cycle from the trend
A good year for an industry can be the result of a cycle, a lasting shift, or both. Mistaking one for the other is a common analytical error.
Cyclical demand
Demand rises and falls with economic activity, credit availability, commodity prices or capacity additions. Profits in such industries are often highest just before capacity catches up with demand, and lowest when it has overshot.
Structural demand
Demand rises because something durable has changed: a population shift, a technology, a regulation, or a change in how customers buy. These shifts take years and usually show up in several sources of data at once.
How to tell them apart
- Look at a long enough history to include at least one downturn.
- Compare industry growth with the growth of the economy or the customer base.
- Ask what would have to be true for the trend to continue, and what would reverse it.
- Check whether new capacity is being added ahead of demand.
Cautions
Industries contain both elements, and the boundary is a judgement. State your assumptions openly so that readers can disagree with them.
Disclosure: This note is for general informational and educational purposes only. It is not investment advice or a recommendation to buy or sell any security. Figures and statements should be checked against primary sources before use.