Predicting the Future: Business Cycles and Economic Indicators

00:00:08 Jerry Mee 

Hello, everyone, and welcome back to another awesome episode of the BIF Bites Podcast. I’m your host, Jerry Mee, and I am joined in the studio today by Mr. Adam Scherer. What’s up, Adam? 

00:00:23 Adam Scherer 

What’s up, Jerry? 

00:00:24 Jerry Mee 

Not much. It’s been a while since we’ve had a joint episode together. 

00:00:28 Adam Scherer 

Yeah, I know. We’ve been doing these solo episodes or interviews, and now we’re back at it. I think it’s good timing because we’re starting to inch toward exam window time. 

00:00:40 Jerry Mee 

That’s true. In fact, I have it marked on my calendar. We are two episodes away from our much-beloved Questionpalooza episode for the high cycle. 

00:00:53 Adam Scherer 

Yeah, that’s great. That’ll definitely help students prepping for their exam. But I have a sense that today’s episode and topic can help as well. Maybe not cover as much ground, but it’s certainly testable. 

00:01:09 Jerry Mee 

I agree. This is a sleeper topic. People often take it for granted. They think they already know it because it sounds like common sense, but then they get a rude awakening on test day. Today, we’re focusing on the business cycle phases. 

00:01:38 Adam Scherer 

That’s right. We’re going to be rocking and rolling up and down that business cycle curve. 

00:01:45 Adam Scherer 

A big part of what we’ll discuss are the indicators, especially with the economy where it is now. I know you, me, and Mike were just talking about real estate markets and how they’re starting to feel different.

Prices are dipping, and things seem a little different across the broader economy. This topic crosses over nicely into what’s happening today. It’s very relevant to students preparing for their exams. 

00:02:25 Jerry Mee 

Exactly. And indicators are key because that’s where a lot of students miss questions. Some aren’t as common sense as they appear at first glance. 

00:02:45 Adam Scherer 

Yes, it’s like ethics in that people take their knowledge for granted. 

00:02:56 Jerry Mee 

Totally. I think because it also shows up on the Series 7 and other FINRA exams, people think, “I studied that back then, I’m fine.” Then they see the CFP questions and realize they’re not as ready as they thought.

We’re here to fix that. We’re here to give you your business cycle tune-up so you’re in shape when these questions appear. Before we go further, let’s define the business cycle for anyone who hasn’t seen it. 

00:03:49 Adam Scherer 

The business cycle describes how the economy fluctuates in its growth over time. Long-term, it trends upward, but short-term, it’s not that simple. There’s constant variability. It’s the ebb and flow of economic activity—production, employment, inflation, consumer spending, and all the moving parts.

I picture them as gears turning together. Sometimes they move smoothly and drive growth. Other times, they grind and slow down. That’s the cycle. It’s made up of four key phases. Jerry, want to walk us through them? 

00:05:20 Jerry Mee 

Sure. The four main phases of the business cycle are trough, expansion, peak, and contraction. You can start anywhere on the cycle, but it always follows that order. We begin with the trough, the lowest point. Think of it as a ditch on the side of the road. Things are bad, but the only way to go is up.  

Next comes expansion, when the economy grows, production increases, and employment rises. This phase creates that long-term upward trend line. Eventually, you reach the peak—the high point. This is where people often get confused.

They assume “peak” means everything’s great, but it actually signals that a downturn may be coming. After the peak comes contraction, when the economy slows down and begins to decline. That continues until it hits another trough, and the cycle repeats. The reason the overall economy still trends upward over time is because expansions usually last longer than contractions. 

00:07:34 Adam Scherer 

That’s a great description. And I love your analogy. When you reach the top of the mountain, it’s all downhill from there—quite literally. But here’s where it gets interesting. The economy isn’t left to run on its own. Businesses make adjustments, and outside parties intervene to influence growth or cool things down.  

The two big influencers are Congress and the Federal Reserve. Congress can use fiscal policy—taxes and spending—to affect growth. The Fed uses monetary policy—interest rates and money supply—to encourage or slow activity. This is where students often get tripped up. Understanding the up-and-down pattern is easy, but when you add in how these policies interact, it becomes complex. 

00:10:00 Jerry Mee 

Exactly. The point of fiscal and monetary policy is to make expansions last as long as possible and contractions as short as possible. For example, during a contraction, credit dries up because banks are nervous about lending. The Fed can lower the federal funds rate to encourage lending and pump more money into the economy. That easy-money policy helps jumpstart expansion again. 

00:11:16 Adam Scherer 

Right. But on the exam, you’ll often have to identify where we are in the cycle based on a few bullet points. Maybe it says unemployment is high, consumer spending is low, and inflation is falling. From that, you need to know we’re in or near a trough. Those clues tell you what the Fed or Congress might do next—like lower rates or increase spending. 

00:12:54 Jerry Mee 

Exactly. You’ll also see questions about indicators: leading, coincident, and lagging. Leading indicators tell you what’s coming, lagging indicators tell you what has happened, and coincident indicators tell you what’s happening right now. 

00:13:29 Adam Scherer 

Leading indicators come before changes in the economy. Lagging indicators confirm trends after the fact. Coincident indicators move with the economy in real time. One key leading indicator is the S&P 500. It’s forward-looking. Market prices reflect expectations of future performance. 

00:14:45 Jerry Mee 

That’s where people get confused. They think the stock market is lagging, but it’s actually leading because it’s driven by future expectations. If companies predict weaker growth ahead, prices drop even if current earnings look good. So the S&P 500 is a leading indicator because it reflects what investors think will happen, not what has already happened. 

00:16:26 Adam Scherer 

Exactly. That’s why we say things are “priced in.” Analysts adjust valuations based on what they expect. When something unexpected happens—like new tariffs—markets react and reprice. Another key leading indicator is the yield curve. 

00:17:28 Jerry Mee 

Yes, the yield curve is one of the most watched indicators. When it inverts—short-term rates higher than long-term rates—it often signals a coming recession. It shows investors are nervous and moving into safer long-term bonds.

Inventory levels, new housing construction, and the money supply are also leading indicators. When inventories pile up, sales are slowing. Builders reduce new projects if they expect demand to drop. And an increase in money supply usually signals economic growth, while a decrease can suggest a slowdown. 

00:21:06 Adam Scherer 

Yes, and no one has a crystal ball. When one indicator says growth is coming and another says contraction, analysts have to interpret the mix and make educated guesses. Coincident indicators include industrial production, manufacturing, trade sales, and GDP. These show what’s happening right now. 

00:22:26 Jerry Mee 

Exactly. GDP is a key coincident indicator—it reflects current activity. And fun fact: there are hundreds of indicators. Economists even invent quirky ones, like the “lipstick effect.” That’s when makeup sales rise during economic downturns.

People cut back on big luxuries but still want small indulgences. Another funny one: Alan Greenspan’s “men’s underwear indicator.” He found that men buy less underwear in tough times. It’s the human dichotomy—makeup sales up, underwear sales down. 

00:25:16 Adam Scherer 

I see an opportunity for some “Greenspan boxer briefs.” Underwear for tough economic times. 

00:25:23 Jerry Mee 

There’s probably a company out there already selling those. And there’s also the “beer consumption” indicator—people switch from craft beer to cheaper domestic brands during downturns. There are hundreds of these fun examples if you want some light studying. 

00:26:07 Adam Scherer 

That’s great research, Jerry. Those are hilarious, but also real examples of behavioral economics in action.