A2 Macro Revision: The Stock Cycle

The stock cycle helps to explain changes in national output because nearly all businesses hold stocks of finished products or raw materials and components as a way of balancing changes in demand.

When demand is strong and running ahead of supply, stocks fall and this is a signal either to raise prices and/or to expand production. Re-stocking by increasing production can be a way out of a recession.

Consider for example the impact of the car-scrappage scheme in the UK which was introduced as a way of boosting demand for new vehicles during the recession. This £2,000 cash incentive lead to a spike in demand some of which was met by selling vehicles stuck in vast car parks adjacent to the assembly plants. But some of the extra spending on new vehicles will have necessitated a rise in demand for components used in making a new car – there was a positive impact on supply-chain businesses and a rise in demand for stocks leading to an injection of extra incomes in the vehicle industry.
In the early stages of a recession, any slump in consumer demand will cause businesses to cut back on output so as to reduce the volume of stocks.

The chart shows “de-stocking”, in the 1st quarter of 2009, the reduction in the value of stocks amounted to more than £5bn. As British-based carmakers produced fewer cars and house-builders cut back on the number of new homes being built, so the derived demand for cement, bricks, glass, steel, rubber and other raw materials and component parts suffered.

The use of ‘just-in-time’ (JIT) stock delivery systems in manufacturing has reduced the need for businesses to hold high stocks of intermediate products. It is now easier for supply to match changes in demand. For example, stocks tend to be less important in the service sector, which now accounts for more than 75 per cent of UK national output.