Introduction:

Time series analysis is a method of studying data that is collected over time at
regular intervals. Its goal is to identify patterns or trends in the data and forecast
future trends based on these findings. A time series consists of three main
components: trend, seasonal, and cyclical. The trend component represents the
long-term direction of the data, while seasonal variations are short-term periodic
fluctuations that are repeated at fixed intervals. The cyclic component in time
series represents the fluctuations that occur over a more extended period,
independent of the trend or seasonal variation.

Definition of Cyclic Component:

The cyclic component in time series refers to a more extended period of non-
random variation in a data series. These patterns can last several years and are
not directly related to seasonal variations or changes in the trend. Unlike
seasonality, which is often regular and periodic, cyclic patterns are
unpredictable, and the duration and amplitude may vary. Consequently, it is not
possible to measure cyclic variation directly, nor can it be eliminated from the
data series entirely.

Characteristics of Cyclic Component:

There are several characteristics of the cyclic component in time series.

Typically, cyclic patterns are observed in economic data, such as Gross
Domestic Product (GDP), unemployment rates, and market fluctuations. The
amplitude and duration of these cycles may vary and can be interpreted in
multiple ways, such as growth and recession periods. Cyclical patterns may also
be observed in physical phenomena such as weather patterns, sunspot activity,
and other environmental factors.The relationship of cyclic often causal or
associative.A cyclic pattern can be graphically represented by a repeating wave
form that deviates around a central trend line.
Example of Cyclic component

example of a cyclical pattern in the economy is the housing market. The

housing market tends to follow a cyclical pattern that can last several years.
During an economic expansion, there is generally a high demand for housing,
which leads to an increase in prices and construction activity. This is often
followed by a contraction phase, where demand for housing decreases, prices
fall, and construction activity slows down.

Another example of a cyclical pattern is the stock market. The stock market
tends to follow a cyclical pattern that is influenced by a variety of factors, such
as changes in interest rates, corporate earnings, and investor sentiment. During
an economic expansion, the stock market tends to perform well, as companies
are earning more profits and investors are optimistic about the future. This is
often followed by a contraction phase, where stock prices fall, and investors
become more cautious.

Other examples of cyclical patterns in the economy include the labor market,
consumer spending, and business investment. These patterns are often
influenced by a variety of factors, such as changes in technology, global
economic conditions, and government policies. Understanding these cyclical
patterns can be useful for businesses and policymakers, as it can help them
make better decisions and prepare for changes in the economy.

Methods for Measuring Cyclical Component:

Various methods are used to measure the cyclic component in time series. One
of the most popular methods for analyzing cyclical components is the Hodrick-
Prescott filter, which smooths a data series to remove short-term fluctuations,
calculates deviations from a trend line, and distinguishes these deviations from
the overall cyclic variation. A less sophisticated method involves visually
inspecting graphs of a time series to identify the underlying cyclical pattern in
the data. Other methods include Fourier analysis, spectral analysis, and signal
processing techniques.

Forecasting Cyclical Patterns:

Cyclic components in time series play an essential role in forecasting future

trends. However, forecasting the cyclical component is much more challenging
than forecasting the trend or seasonal components. Cyclical patterns are
unpredictable and are typically only identified after the data has been collected.
Nonetheless, forecasting the cyclical component is possible by incorporating
trend and seasonal patterns into the analysis. Various statistical methods such as
growth models, regression, and time series models can be used to forecast
cyclical patterns.

Conclusion:

In conclusion, the cyclic component in time series represents the long-term

unpredictable patterns in the data series, independent of the trend or seasonal
variations. Characteristics of the cyclic component include the observation of
non-random variation in time series data, irregularity, and deviations from the
long-term trendline. Methods for measuring and forecasting cyclic components
include visual inspection, Hodrick-Prescott filter, Fourier analysis, and signal
processing techniques. Forecasting the cyclic component, while challenging, is
possible by incorporating trend and seasonal components into the analysis,
using statistical models. Understanding the cyclical component in time series
can help forecasters inform decision-makers, improve economic policies, and
mitigate financial risks by identifying trends in time

References

OECD (2019), OECD Compendium of Productivity Indicators 2019, OECD Publishing,

Paris, https://doi.org/10.1787/b2774f97-en