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 / Spring 2007 / Issue 46(originally published by Booz & Company)


Joseph Ellis: The Thought Leader Interview

The author of Ahead of the Curve explains the mysteries of the business cycle.

Photograph by Matthew Septimus
Every economic theory is, at heart, a kind of detective story. Hidden within misleading and contradictory data are clues to the mysteries of growth and decline. Why does inflation strike? What causes recessions? What are our prospects for the months and years ahead?

Since the mid-1970s, in a quest that continues to the present day, Joseph Ellis has been tackling such questions — first from an investor’s perspective and then more generally. As a partner at Goldman Sachs and a research analyst covering the retail sector, he began looking closely and rigorously at the correlations of economic trends. His relentless efforts gave him a distinctive stature in his industry: For 18 consecutive years, Institutional Investor ranked him as the number one retail analyst on Wall Street.

Along the way, Ellis gradually developed his own theory about the cause of economic cycles. The mysterious culprit, he says, is not capital or industry, but the broad base of consumer power. (In effect, hourly wages make the biggest difference.) Although his ideas had gained a quiet reputation in the world of financial services, it wasn’t until he retired, in 1994, that he began putting his research together for the general business reader; and it wasn’t until 2005 that he published Ahead of the Curve: A Commonsense Guide to Forecasting Business and Market Cycles (Harvard Business School Press).

As some of his critics have pointed out, Joseph Ellis’s method for tracking causal relationships is narrowly focused on a few key indicators, and its predictive power depends on the way people apply it to their own industry. But his insights also provide a more complete intuitive understanding of the factors that drive the economy.

Ellis himself is only a part-time prognosticator these days. He posts  up-to-date charts of economic cycles and indicators to his Web site,, and he is the cofounder of a gift and stationery shop chain, based in the northeastern U.S., called Blue Tulip. We met with him in October 2006 in the strategy+business offices in New York. It soon became clear that what compels him is the desire to educate, fueled by the belief that if decision makers everywhere learn to see trends and interrelationships as he does, they can avoid many of the false starts and pitfalls that come from following the curve, rather than leading it.

S+B: It almost seems that there are two separate literatures on navigating the economic future, one for managers and one for investors. You seem to have written one of the rare books aimed at both audiences. Was that deliberate?
ELLIS: Yes. The economic cycle, as it affects investors, is really the same one that affects business decision makers. They have different ways in which they time their ups and downs, but their two worlds are so closely related cyclically that I thought they would both receive value by looking more critically at the sequences and timing that recur cycle after cycle.

At Goldman Sachs, I and my colleagues in the retail research group studied economic cycles historically, covering a period of more than 40 years. We tracked indicators in the macro economy — consumer spending, employment, inventory levels, corporate profits, and so on — alongside bull and bear markets, to see which were leading indicators (advancing before the stock market advanced and declining before it declined) and which were lagging. Once you know that, then you can focus on the few key indicators driving the economy. And doing so really serves both audiences — business managers and investors.

S+B: Don’t most economists attempt to do exactly that?
They do. But they often do it in a way, based on wildly fluctuating month-to-month and quarter-to-quarter changes in data, that obfuscates the repeating cause-and-effect relationships that exist among economic indicators. This often obscures key relationships and makes it impossible for them to demonstrate these relationships to noneconomists, who need to see the pattern for themselves.

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