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

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By Joseph H. Ellis
Harvard Business School Press, 2005
300 pages, $29.95

Joseph H. Ellis’s prodigious analytical skills helped make him the top-ranked retail-industry analyst for 18 straight years. Those skills are on fine display in Ahead of the Curve: A Commonsense Guide to Forecasting Business and Market Cycles.

This is a practitioner’s take on the application of Economics 101 to everyday business. As a retail-industry analyst, Mr. Ellis, not surprisingly, emphasizes the primacy of consumer spending (personal consumption expenditure, or PCE). His book is all about establishing the role of PCE, which makes up 70 percent of gross domestic product (GDP), in driving the demand chain (industrial production, capital spending) of the economy.

He begins by establishing a sound statistical foundation for his arguments. His method, which he calls “rate of change in economic tracking” (ROCET), stresses the importance of small changes in rates of growth of economic indicators rather than absolute movements. He contends, for example, that the economic concept of a recession, defined as a period of time with negative economic growth, is useless for forecasting purposes. In addition, much economic data is confusingly volatile because it is reported as month-on-month or quarter-on-quarter change. ROCET focuses on graphing year-over-year change of PCE and other variables over long periods of time. When such changes in PCE are graphed together with a dependent variable such as corporate profits, the relationships among them become clear. The results bolster Mr. Ellis’s arguments that PCE is the prime mover in developed economies.

Once he has established ROCET as his method, Mr. Ellis goes on to examine the relationship between changes in PCE and several key economic indicators, including employment, capital spending, and stock market levels. He then turns to the drivers of PCE itself, such as real hourly earnings, the influence of which can be modified by changes in employment levels and consumer borrowing.

The graphs throughout the book are essential to understanding the author’s arguments, and they reward detailed study; the graphs themselves are a model of clarity. In addition, 20 of the most important charts are maintained and updated on an excellent Web site (www.aheadofthecurve-thebook.com). Here, too, the sources of key data are shown, along with hyperlinks to the various institutions that provide them.

Ahead of the Curve is an important book for every manager who needs to understand how to interpret economic data and deduce the impact that change in economic indicators can have on business activity. The book simplifies without being simplistic, and the author is always conscious of the systemic complexities of cause-and-effect in the economy. What comes across is the importance of clarity of focus and the discipline needed to base decisions on time-tested economic relationships, instead of chasing after the latest fads and pop explanations. This book contains everything you, as a manager, wanted to know about economic cycles but may never have dared ask.

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