Business Cycle

The Business Cycle > Exam relevance: The business cycle appears in Section I (Economic Factors & Business Information), which accounts for approximately 15% of the exam (~20 questions). You should expect 2–4 questions directly or indirectly touching on cycle phases, indicators, and how they connect to investment decisions. --- ## What Is the Business Cycle? The business cycle describes the recurring pattern of expansion and contraction in overall economic activity over time. No economy grows in a straight line — it moves through predictable phases, and understanding those phases helps investment advisers anticipate how different asset classes, interest rates, and corporate earnings may behave. The cycle has four phases: | Phase | Also Called | What's Happening | |---|---|---| | Expansion | Recovery / Growth | GDP rising, employment increasing, consumer spending up, corporate profits growing | | Peak | Top | Maximum economic output; inflation pressures often highest here | | Contraction | Recession / Slowdown | GDP falling (two consecutive quarters = recession), unemployment rising, spending declining | | Trough | Bottom | Lowest point of economic activity; sets the stage for the next expansion | Think of it like a wave: expansion is the rising water, peak is the crest, contraction is the fall, and trough is the bottom before the next wave builds. --- ## Leading, Coincident, and Lagging Indicators Economic indicators are data points used to identify *where* we are in the cycle — or where we're *headed*. The exam tests your ability to classify them correctly. ### Leading Indicators Leading indicators change *before* the economy changes — they predict the next phase. Examples: - Stock market prices (equity markets often move 6–12 months…