Lesson 4 of 6 · 15 min
Labour, capital spending, inventories, consumers and housing
Over the cycle, firms adjust hours before headcount, cut light equipment before big projects and let inventories swing sharply, while consumer credit, housing and trade follow their own predictable rhythms that analysts read through specific indicators.
In short
- Labour: in a downturn firms cut overtime and hours first and hoard workers (hiring and training are costly); layoffs come only if weakness persists. In recovery they add overtime before hiring. So employment lags the cycle.
- Productivity (output per hour) tends to be highest at the end of a contraction, when firms run lean production.
- Capital spending is one of the most procyclical and volatile parts of GDP. Recovery: efficiency spending (software, light equipment). Expansion: capacity spending. Contraction: light equipment cut first, then heavy equipment and construction; maintenance is scaled back.
- New orders for capital goods lead actual spending; analysts watch core orders (excluding defence and aircraft).
- Inventories are small but swing fast. The inventory-sales ratio falls in recovery, is stable in expansion, rises in slowdown and drifts back to normal in contraction.
- Consumers and housing: confidence and building permits lead; consumer instalment debt relative to income lags.
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