Economic Factors and Business Cycles
Key SIE concepts linking GDP, inflation, interest rates, and indicators to securities prices.
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Questions Covered in This Set
10 cards to master
What are the four phases of the business cycle?
Expansion, peak, contraction (recession), and trough.
Exam definition of a recession
Two consecutive quarters (6 months) of declining real GDP. A depression is six consecutive quarters (18 months) of decline.
Why is the stock market a leading indicator?
Markets are forward-looking — they typically turn down before a recession begins and turn up before recovery shows in the data.
Name key leading indicators
Stock prices, building permits/housing starts, new orders for durable goods, initial jobless claims, average weekly hours, consumer expectations, M2 money supply, yield curve spread.
Name key coincident indicators
GDP, industrial production, personal income, manufacturing and trade sales.
Name key lagging indicators
Duration of unemployment, corporate profits, inventory-to-sales ratio, unit labor costs, consumer debt to income.
How is inflation measured, and who fears it most?
By the Consumer Price Index (CPI), a basket of consumer goods; fixed-income investors fear it most because it erodes purchasing power of fixed coupons.
What is stagflation?
Stagnant growth with high unemployment combined with rising prices.
Formula for real return
Real return ≈ nominal return − inflation rate (e.g., 5% yield − 3% CPI = ~2% real).
How do interest rates affect bond prices?
Inversely — when rates rise, existing bond prices fall. Long-maturity, low-coupon (high duration) bonds fall the most.
