The business cycle and who benefits when

Companies do not all move with the cycle. Cyclical companies sell what a buyer can postpone: a new car, a holiday flight, a kitchen refit. Their earnings swing hard in both directions. Defensive companies sell what people buy in any month — electricity, groceries, basic medicines — so their earnings are steadier. That is why defensive names hold up in a contraction and lag in a strong expansion.

Growth is a separate axis, not a synonym for defensive. A growth company reinvests its earnings and is priced on what it might earn years from now, so it usually pays little or no dividend. Defensive describes the stability of demand; growth describes where the earnings are expected to come from. A water utility can be thoroughly defensive, pay a large dividend, and be no kind of growth company.

Indicators are sorted by when they turn. The Conference Board publishes three composite indexes. Leading indicators have turned before the economy: its leading index includes building permits for new private housing, manufacturers’ new orders, stock prices and weekly initial claims for unemployment insurance. Coincident indicators turn at about the same time as the economy: payroll employment, personal income less transfer payments, manufacturing and trade sales, and industrial production. Lagging indicators generally turn afterwards and confirm the turn: the lagging index includes the average duration of unemployment, the average prime rate and the ratio of inventories to sales.

Two definitions behind the phase names are worth having exactly. The Consumer Price Index, published by the Bureau of Labor Statistics, measures the average change over time in the prices paid by consumers for a representative basket of goods and services; it is inflation as households actually meet it and the most widely used measure of it. And the two-quarters-of-falling-GDP line is a press shorthand rather than the official test: the NBER says most of the recessions it dates include two or more such quarters, but not all of them. The body that dates US recessions, the National Bureau of Economic Research, calls a recession a significant decline in economic activity spread across the economy and lasting more than a few months, judged on three criteria — depth, diffusion and duration — that it treats as somewhat interchangeable, so an unusually severe decline can qualify even if it is short.

Company results arrive in financial statements, and two of them answer different questions. A balance sheet shows what a company owns and owes at a moment in time: its assets, its liabilities and its shareholders’ equity, and it balances because assets equal liabilities plus shareholders’ equity. An income statement shows performance over a period, usually a year or part of a year: the revenue the company earned and the costs and expenses of earning it. One is a snapshot of position; the other is a record of results over time.