Ahead of the Curve: A Commonsense Guide to Forecasting Business and Market Cycles [Hardcover]

Joseph H. Ellis (Author)

Book Description

Publication Date: October 11, 2005

Economic and stock market cycles affect companies in every industry. Unfortunately, a confusing array of anecdotal and conflicting indicators often renders it impossible for managers and investors to see where the economy is heading in time to take corrective action. Now, a 35-year Wall Street veteran unveils a new forecasting method to help managers and investors understand and predict the economic cycles that control their businesses and financial fates. In Ahead of the Curve, Joseph H. Ellis argues that the problem with current forecasting models lies not in the data, but rather in the lack of a clear framework for putting the data in context and reading it correctly. The book explains critical economic indicators in nontechnical language, identifies and documents the recurring cause-and-effect relationships that consistently predict turning points in the economy, and provides the tools managers and investors need to position themselves ahead of cyclical upturns and downturns. Economic events are not as random and unpredictable as they seem. This book helps readers recognize and react to signs of change that their rivals don't see—and win a sizeable competitive advantage. Joseph H. Ellis was a partner at Goldman Sachs and was ranked for 18 consecutive years by Institutional Investor magazine as Wall Street's No.1 retail industry analyst.

Editorial Reviews

Review

"Bewitched, bothered and befuddled by the daily drizzle of economic data? Joseph H. Ellis has a cure." -- Bloomberg News

"The recession obsession is a terrible mistake...We need to find a way to talk about slowing rates of growth." -- New York Times

About the Author

Joseph H. Ellis was a partner of Goldman Sachs and was ranked for eighteen consecutive years by Institutional Investor magazine as Wall Street's #1 retail-industry analyst.

Product Details

• Hardcover: 256 pages
• Publisher: Harvard Business Review Press (October 11, 2005)
• Language: English
• ISBN-10: 1591396913
• ISBN-13: 978-1591396918
• Product Dimensions: 6.4 x 1 x 9.4 inches
• Shipping Weight: 1.4 pounds (View shipping rates and policies)
• Average Customer Review: 4.2 out of 5 stars  See all reviews (34 customer reviews)
• Amazon Best Sellers Rank: #339,758 in Books (See Top 100 in Books)

More About the Author

Discover books, learn about writers, read author blogs, and more.

Most Helpful Customer Reviews

114 of 118 people found the following review helpful

5.0 out of 5 stars Prescient Prudence December 12, 2005

By Robert Morris HALL OF FAMETOP 100 REVIEWERVINE™ VOICE

Format:Hardcover

This is one of the most informative business books I have read during the past 12-18 months as Ellis shares with his reader what he learned when he set out "to investigate how I might develop an improved method for forecasting consumer spending and, with it, the rest of the economy. Furthermore, I wanted to document the basis for my forecasts with such clarity that my [Goldman Sachs] clients would understand not only the forecast but also the rationale supporting it." At this point, it is worth noting that, for eighteen consecutive years, Ellis was ranked as Wall Street's #1 retail industry analyst by Institutional Investor magazine.

As Ellis explains, his book has two broad purposes: "To help us understand and then overcome major flaws in the way most economic information is reported and digested by the business, investment, and economist communities" and "To put the this new framework to work in forecasting." The material is carefully organized and presented in four Parts:

1. "Seeing" the Economy: Creating Order from Chaos
2. Consumer Spending: The Cornerstone of the Economy and the Stock Market
3. Forcasting Consumer Spending: Understanding the Key Indicator Relationships
4. From Theory to Practice: Applying the Charting Discipline to Your Own Forecasting

Ellis then provides four appendices. It would be a disservice to him as well as to those who have not as yet read his book to comment in detail on each of the most important insights concerning, for example, the "major flaws" to which Ellis refers earlier. Rather, I wish to share three reasons why I think so highly of this book.

First, I commend Ellis on his explanation of how and why consumer spending drives the demand chain in the economy, especially in terms of the correlations between and among consumer spending, corporate profits, and the marketplace. When commenting on industrial production and the inventory effect: "The key point here is that because inventories in the retail, distributor, and factory pipelines grow during periods of strengthening consumer spending and shrink when consumer spending slows, the changes in the industrial production that supplies this system are far more volatile than the changes in consumer spending at the front end of the system." (page 75)

I also commend Ellis on his brilliant analysis of the separate but interdependent factors which can (indeed should) guide and inform forecasting consumer spending. Specifically, real income; employment and unemployment; interest rates, inflation, and the economic cycle; interest rates and the stock market; and the link between federal deficits and interest rates. When commenting on the key determinant of growth in unit consumer spending, Ellis suggests that it is "the unit purchasing power, or real wages, of the 93% to 96% of the workforce that is employed (given an unemployment rate of 4% to 7%), rather than marginal changes in the number of employed (or the unemployment rate)." Then later in Chapter Ten, Ellis explains how the real average hourly earnings series published by the Bureau of Labor Statistics "provides the measurement we need of the purchasing power of those employed." Moreover, it "serves as the single most reliable leading indicator of consumer spending and consequently also is one of the better predictors of the general direction of the economy and the stock market." (pages 117-118)

Finally, I appreciate the precision with which he explains how to calculate the macroeconomic effect of advancing or declining consumer borrowing on year-over-year consumer spending growth. Here's another brief excerpt: "In general, although borrowing clearly is affected by interest rates, it increases most when employment growth in the economy is at its strongest and consumers have the economic confidence to take on additional debt; borrowing has its most impact when job-based economic confidence is low." (page 214)

Hopefully this brief commentary will encourage many of those who read it to obtain a copy of Ahead of the Curve. Even those who have little (if any) interest in forecasting business and market cycles will nonetheless receive a wealth of valuable advice about prudent management of money. As a value-added service, Ellis provides monthly updated versions of the nineteen most important charts in this book (provided in table D-1 on page 256) at www.AheadoftheCurve-theBook.com.

128 of 139 people found the following review helpful

1.0 out of 5 stars Don't be fooled April 19, 2006

By Fernando Saldanha

Format:Hardcover|Amazon Verified Purchase

I started to read this book with high expectations. I believe that a strong dose of commonsense sometimes can do more than a lot ot analytical expertise (I have a Ph.D. in Economics from MIT, and through the years I have come to recognize the limitations of hard analytical methods). The first few chapters of the book were OK. However, I was expecting the book to end with a bang, but it did end with a whimper. The author does not provide a model that can be used to forecast anything. He basically tells you to build your own. There are two possibilities:

1) You have enough technical expertise to build an econometric model of the US economy that would potentially be useful to forecast the stock market.

2) You have no analytical skills.

In case 1) you will find out that the book is basically useless, as it contains nothing new or original. The author makes a lot of noise about tracking rates of change instead of levels, but anyone who does econometrics knows he just transformed his variables so that they are stationary, a requirement for doing meaningful regressions.

In case 2) after reading the book there is nothing you can do to forecast the stock market except possibly to read the comments in Mr. Ellis web site.

The leading relationships that Mr. Ellis claims exist between variables like personal consumption expenditures and the stock market are not easy to find (assuming they exist) and the graphical tools used by Mr. Ellis are totally insufficient for the task.

Let me end quoting from the book (Appendix D, page 263):

"Those choosing to construct their own charts ... may notice some discrepancies between charts constructed from data on these Web sites and the charts in this book. This results from the "rebasing" of the statistics by the government and other bureaus that use them. As far back as the early 1980s, the elapsed time between peaks and throughs in the leading and lagging indicators was extremely clear in the years the data was reported and for five to ten years afterward. However, in following years these lead/lag times often shrunk or disappeared altogether as the data was restated and rebased by the issuing bureaus."

39 of 41 people found the following review helpful

5.0 out of 5 stars TWO THUMBS UP..... November 6, 2005

By J. Turkeri

Format:Hardcover

Joseph Ellis, gives a clear method on how to forecast business cycles...This book is NOT all about unproven theories, or fancy calculus, or econometrics, on the contrary, Joseph Ellis shows us a simple yet elegant logic on deducting casual relationships among the driving forces of the economy, which can make one filter out all the unnecessary noise and see clearly what really makes the economy thus the stock market perform....This book is a MUST READ...