Economic Factors and Business Information
What the exam actually tests
Most economics items on the Series 66 are about transmission, not definition recall: policy and data move interest rates, and rates move prices, yields, and the recommendation you eventually give a client. Know the four phases of the business cycle (expansion, peak, contraction, trough) and be able to sort indicators into the right bucket.
Indicators and policy
Leading indicators turn before the economy does: building permits, initial jobless claims (inverted), stock prices, M2, average weekly manufacturing hours, the shape of the yield curve. Coincident indicators move with the economy: payrolls, personal income, industrial production. Lagging indicators confirm after the fact: the unemployment rate, CPI, the prime rate, bank loans, inventory-to-sales ratio. The Fed's three classic tools are open market operations (primary, fine-tuning), the discount rate (largely symbolic - it follows rather than leads market rates), and reserve requirements (rarely changed). Fiscal policy is taxation and spending, and its impact is amplified by the multiplier.
Rates and prices
Bond prices and yields move inversely; price sensitivity rises with maturity and falls with coupon. A normal curve slopes upward, while an inverted curve has historically preceded recessions. The Fisher relationship separates nominal from real return.
Traps
Expect 'discount rate' where 'federal funds rate' is intended, 'CPI' where 'PPI' is intended (PPI turns first, at the wholesale level), and confusion over a stronger dollar (hurts exporters, helps import prices).
Worked example
Nominal return 5.5 percent, inflation 2.0 percent means a real return of about 3.5 percent. If expected inflation jumps to 3.0 percent and the nominal rate stays put, the real return falls to 2.5 percent; discount rates rise and P/E multiples compress.