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Beating the Business Cycle

Today I am reviewing Beating the Business Cycle: How to Predict and Profit from Turning Points in the Economy.

By Lakshman Achuthan and Anirvan Banerji

Read my other book reviews here.

Lakshman Achuthan and Anirvan Banerji are co-founders of the Economic Cycle Research Institute, or ECRI, which I have discussed on this site several times. The firm has a rich history of accurately predicting recessions and recoveries and I have enjoyed reading Achuthan's views on the current state of the economy, so I was excited to learn that this book existed, even if it is a bit out of date (published in 2004)

The book is ostensibly about predicting the turning points in the business cycle so as to help guide business and investment decisions. In the introduction, the authors write "It really is possible to predict recessions. And we will show you how, so that you will no longer be at the mercy of economic cycles." This is a tall order and I've been leery of books making such big promises. However, I figured there would be some useful pointers that I could use in improving the utility of my Economic Indicators Dashboard, as the authors explicitly state:

In Beating the Business Cycle, we share this information so that you, too, can create your own customized "economic dashboard" that will help steer your future financial decisions in the right direction before you find yourself plunging into the abyss.

Let me be clear from the start, this book does not teach you how to predict recessions, nor does it provide much use in creating a custom economic dashboard. Rather, it is more of a marketing tool for ECRI and its services. Is that a bad thing? Not necessarily. If you can get past the boredom of the authors' constant examples of how successfully they guided this client or how accurately they called that turning point (in the face of searing skepticism I might add), and if you can accept that the book does not actually achieve what it claims, there are some limited instances where this book would be worthwhile for some readers.

For example, there is a good introductory explanation of the business cycle and the often confused growth rate cycle, as well as the use of indicators and how the various categories (lagging, coincident, and leading) of indicators work. There are many examples strewn about the book of different indicators and general discussion of how they have performed in certain situations in the past. Unfortunately, this is done haphazardly, whereas the book would have been greatly improved had the authors taken a systematic approach to discussing different indicators and their predictive power historically exist.

Another thing the book might be useful for is sparking interesting in digging deeper into economic indicators (though, if you pick up the book presumably you are already quite interested). Before reading the book, I would have said a recession begins when there are two consecutive quarters of negative GDP growth. Unfortunately this is a lagging and imperfect indicator, so the authors go back to the basics to show first what a recession fundamentally is:

[D]uring a typical recession, companies fire employees, incomes fall, spending goes down, and output declines. By examining the historical record, we know that, during recessions, these four factors-employment, income, output, and sales-tend to decline together.

Unfortunately, perfect knowledge of the comovement of these factors would still only be a coincident indicator and we want leading indicators. The authors give a few very rough examples of leading indicators ("sensitive commodity prices") and are quick to point out that there are many pitfalls. Complicating things further, rather than looking at these variables directly, we often want to look at rate of change in these variables. Oh, and the different variables all have varying predictive power and it is easy to be misled. All of this is well and highly complicated, so why don't you just let ECRI do the heavy lifting and pay for their services? Such is how the book carries on. You keep reading with the expectation that in just a few more pages they will provide a clearer outline of the different indicators and their predictive power, but alas the conclusion is this:

So what is our secret? What are the components of the leading indexes we have created, and why do they work when others fail? Unfortunately, there is no short list of indicators that will work for every circumstance. And no single indicator has proven to be the Holy Grail of economic forecasting. Instead, we regularly monitor hundreds of indicators that have proven their worth over time. We have found that different indicators take turns at being accurate predictors. Trying to anticipate which one is going to accurately forecast the next turn in the economy is a fool's errand. But, over time, we have identified a limited number of drivers of the economic cycle that, taken together, can show where the economy is headed. While it is impossible for us to know which individual driver will take the lead at the next turning point, together they can detect early signs of an upcoming turn in the economy with near certainty.

So "ultimately there is no short list" but they "have identified a limited number" (read: short list) of drivers that can "show where the economy is headed" but they won't share it despite that being precisely what the book claims it does.

Ok, I can't say I was surprised by the book's inability to turn me into a business cycle predictor, but how about helping the reader create his own "customized economic dashboard?" Well, this boils down to - I swear I am not making this up - going to ECRI's website on a regular basis and reviewing the Weekly Leading Index (WLI) and the Future Inflation Gauge (FIG)! So, not really "your own customized economic dashboard" after all.

Should you buy this book? Probably not. I was quite disappointed that Achuthan, who I respect and have found to write logical and valuable pieces on the economy, would publish something as superficial as this.

Ok, on a side note, this is the third somewhat negative book review I've done in a row. I am starting to feel a lot like Charlie Brown with Lucy and the football; I don't see why authors feel compelled to market their books as something different than they are, only to disappoint readers and ruin their own reputations. It seems short-sighted. Anyways, I am hunting for good books. If you have any book recommendations (or if you'd like to write one of these reviews) let me know. I've got a few promising books in the hopper, so hopefully the next one will be positive!

Source: Book Review: Beating The Business Cycle