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What Is Procyclic?
Let me explain procyclic to you directly: it's a state where the behavior and actions of a measurable product or service align closely with the economy's cyclical ups and downs.
Key Takeaways
Procyclic means there's a positive correlation between the value of a good, service, or economic indicator and the economy's overall condition. You'll see this in indicators like gross domestic product (GDP), labor, and marginal cost. Policies and fiscal behaviors often follow procyclic patterns during booms and busts.
Understanding Procyclic
Economic indicators relate to the economy in three ways: countercyclic, where they move opposite to the economy; acyclic, where they have no real connection; or procyclic, which is what we're focusing on here.
Procyclic specifically points to that positive correlation between a good, service, or indicator's value and the economy's state. This means it grows when the economy grows and declines when the economy declines.
Take GDP, labor, and marginal cost as prime examples of procyclic indicators. Most consumer goods fit this too, since people buy more discretionary items when the economy is strong.
You'll notice that policies and fiscal behaviors tend to go procyclic in boom and bust times. During prosperity, people act in ways that match and even prolong the growth.
Procyclic Example
Consider the buildup to the late 2000s housing and financial crisis: there was a widespread expectation of continued gains. Consumers spent more, borrowers took on mortgages they couldn't afford, financial institutions pushed this behavior, and government policies didn't intervene much. As long as everyone supported the boom, it kept going until bad debt overwhelmed everything and markets crashed.
When the bust hit, things shifted: consumer spending fell, banks tightened lending, foreclosures surged on unpaid mortgages, and new federal laws aimed to prevent repeats. These were all procyclic reactions to the situation.
As time passes from that crisis, spending rises again, and some restrictive laws get challenged by financial institutions. This is procyclic because, without a push to change, people want to lift constraints when times seem good.
The issue with purely procyclic reactions is they don't encourage forward planning to brace for the downturns that always come back. If we only back preventative measures during crises, the same risky behaviors will likely repeat and cause another collapse.
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