3 SIMPLE RULES
for improving your forecasting of economic and stock-market cycles, and used in the charts of Ahead of the Curve and on this web-site
by Joseph H. Ellis
Most economic data is presented in press reports and economic commentaries on an absolute basis (i.e., simply the data itself) or in terms of month-to-month (M/M) or quarter-to-quarter (Q/Q) rates of change. M/M and Q/Q rates of change are so volatile that it is impossible for the observer to weed out the “noise.”
Chart economic data series based on YEAR-OVER-YEAR (Y/Y) rates of change, and historical cyclical patterns, as well as current uptrends and downtrends will become clear. This, in turn, will allow the user to make pragmatic comparison with other economic data series.
Understanding economic cause and effect requires evaluating TWO economic data series in comparison with each other. Most economic reporting comments only on the data series being reported, without comparing the data with other economic data series that may lead or lag it, thereby providing virtually NO forecasting value.
Every economic chart must have TWO LINES (economic data series) if the user is ascertain whether a lead/lag or cause/effect relationship exists, thereby deriving forecasting value. Charts with a single line have little use.
“Recession,” loosely defined as two consecutive quarters of decline in real GDP. is a hopelessly lagging, and therefore—from a planning or investment standpoint—relatively useless, measure of economic harm. By the time the economy is declining (recession), most economic harm and the decline in the stock market has already occurred.
Businesses and investors must ignore attempting to forecast “recession,” and instead focus on determining when Y/Y RATES OF CHANGE turn upward or downward. The charts in this book and web-site are constructed to do this.
Importantly, periods of stock market decline (bear markets) are marked with vertical yellow bars on every chart, showing the remarkably consistent timing relationship between the U.S. stock market and Y/Y rates of change in key U.S. economic indicators.