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Ahead of the Curve will arm you with the knowledge you need to deflect useless theories and reject hype. Economic analysis can be a do-it-yourself activity. Instead of tracking absolute increases and declines, the methods in this book look at changes in growth to make economic forecasts. The tools are based entirely on examining historical data for recurring patterns.

Ahead of the Curve

Ahead of the Curve

by Joseph H. Ellis

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1.26K reads

Economic Forecasts Are Worse Than Weather Forecasts

Economic information comes from all angles in the media, constantly exposing us to endless analysis, commentary, opinion and debate. Yet this onslaught doesn’t seem to make us any wiser in knowing where the economy is heading. For the millions of people trying to read the economy, only a few are ...

Every day, we’re exposed to lots and lots of economic data. There are countless forecasters making economic predictions. Of all the people and organizations predicting the future, none are so consistently accurate as to be reliable. Nevertheless, we do need some way to interpret the trends. We ne...

Analyzing economic data is as simple as gathering historic and current data from the internet and using Excel or similar software to assemble it all into an easy-to-read chart. Anyone can do this. It doesn’t require special skills or tools.

Econometric analyses, on the other hand, are com...

 To get a reasonably good forecast, one has to just construct charts out of historical data and look for possible cause-and-effect relationships.

The trick is to be smart about how you chart the relationships. Changing the organization and tracking of data can be useful preparation for anal...

The economic cycle is driven by cause and effect. Personal income drives consumer spending. Businesses respond to consumer spending by increasing production which, in turn, requires greater investments in infrastructure/capital spending. Consumer spending, production and capital spending all driv...

Consumer spending dominates the economy. Because it is such a large share of GDP, it drives corporate profits — and corporate profits, as we saw, drive employment. The stock market is a predictive indicator, moving up and down with consumer spending.

Consumer spending forecasts, then, can...

  • At the peak, consumer spending and GDP are growing, profits are rising, and employment is hunky-dory. The stock market continues to peak and investors are enthusiastic.  
  • Then, things slow a little. The economy is still growing, but the rate of growth has been reduced. Interest rates...

Market Cycles have long periods, sometimes lasting years, during economic slowdowns when stocks just aren’t a good investment. In cycle after cycle, businesses always seem to get caught in periodic downturns, and by the time the leaders realize they’re in a downturn, it’s too late to do much abou...

There are two big errors in traditional economic analysis. The first mistake is regarding recession as the main indication of economic slowdown. Recession is identified by GDP, but by the time the decline has hit GDP and it reflects the slowdown, significant portions of the economy are already da...

A recession, as a reminder, is defined as more than two-quarters decline in real GDP. This measurement tends to put observers into a simplistic, dualistic head-space. If GDP is positive, then it’s good; if GDP is negative, then it’s bad. A slowdown that doesn’t land GDP in the negatives doesn’t p...

Recessions are infrequent. Slowdowns are more important, and when you look at the numbers during these periods, GDP growth is actually inhibited more than you’d imagine if you were just looking at recessions. Recessions are bogeymen. Declining rates of growth are the real culprit.

Too much reliance on recession as an indicator is one problem; the second problem is the standard practice of measuring the change in short-term increments– periods so short they can disguise larger trends.

The noisy, quarterly charts with wild swings of data and little context are confusin...

Leading indicators cycle through several phases. Starting with the last phase of the previous cycle.

It’s important to use the right leading indicators. The cause-and-effect relationship should make sense. When they’re charted out together, a causal relationship should be easy to see. But r...

It’s dangerous to imagine that you’re looking at unique circumstances and that on this occasion the usual pattern won’t hold. Chances are good that you’re wrong. Look at charts of historical data — you will see these same patterns. Of course, there are unique variations with iterations of each cy...

Eighty percent of GDP is from the demand cycle, wherein consumer spending leads to industrial production which leads to capital spending. How does the demand cycle effect the stock market? Well, lots of things can move the market, but there are only a few consistent, significant market movers out...

The best time to sell is when the economy is peaking, which is counterintuitive for many people. People want to believe the good times are going to keep rolling. Alternatively, the best time to buy is when the market is still tanking but close to reaching bottom. It’s hard to have faith when ever...

There are lots of different things that influence consumer spending. There are financial factors (for example, wage and consumer borrowing), fiscal and monetary factors (for example, taxes and interest rates) and there are psychological factors (for example, war, terrorism and instability). There...

There are two kinds of consumer spending power: personal income (including things like paychecks) and personal wealth (investments and similar things). Income has a large influence on consumer spending — the more money flowing in, the more people have to spend — ...

Real wages, that is to say the actual amount that workers make, is more relevant to growth than changes in the number of employed or unemployed workers. Although often overlooked as a leading economic indicator, wages and salaries are more important than wealth, which usually isn’t as liquid (if ...

People with jobs are more likely to spend money, and it should follow that employment drives the economy. But when the economy goes sour, companies fire workers. It should follow that the economy drives employment. Both contradictory statements are true.

The market finally bottoms out. But...

One of the forces with the most influence on the economy is the Federal Reserve Board’s influence on interest rates. Some types of interest rates can affect consumer borrowing which affects consumer spending. Because the Federal Reserve Board gets so much media attention, its actions have a psych...

The Fed rate is also tied to inflation, which impacts earnings, which affects consumer spending. Inflation also moves hourly wages and direct interest rates. This can create the impression that interest rates and consumer spending are more closely related than they are.

The Federal Reserve...

Interest rates have two important effects on the stock market:

1) they affect overall economic growth

2) they affect price-to-earnings ratios.

Charting out these relationships is useful for understanding market trends. Consumer spending drives corporate profits and, ultimatel...

To figure out the relationship between the federal deficit and interest rates, you have to remember that federal debt is just one category of all the debt in the economy.

There’s also state and local government debt, not to mention consumer debt and corporate debt. In fact, of all the deb...

Manufacturers should determine the categories of expenditures or sales that are appropriate for and relevant to their products. Producers can use consumer spending to predict what the upcoming cycle will look like.

All sorts of sectors are sensitive to consumer spending. For business mana...

Economics professors would also benefit from teaching the ideas in this book. Most economics classes cover a lot of theories and have plenty of graphs, but they don’t use enough real-life data for modeling.

They need to get down to the nitty-gritty of cause and effect. Economics is great ...

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