Jerome Levy first developed the profits approach at the beginning of the twentieth century, and the approach is now used by his grandson David, who has accumulated a distinguished record of insights over several decades. Among other research products, the Jerome Levy Forecasting Center continues to publish The Levy Forecast®, established in 1949, America’s oldest publication devoted exclusively to forecasting and analyzing general economic and business conditions.

VIDEO: David Levy talks about the history of the Jerome Levy Forecasting Center

The Derivation of the Profits Equation

The profits equation (profits identity) was derived independently by two men a generation apart, Jerome Levy and Michal Kalecki. The first was Jerome Levy, a physicist turned businessman, who sought to explain and solve the unemployment problem. He began his study of economics in 1908 by examining the sources of profits. By 1914, he had derived the profits equation, along the way creating an entire accounting system for the U.S. economy decades before the development of the national income and product accounts and the concept of gross domestic product. Levy’s insights led to a forecasting experiment that was to continue over three generations.

Levy’s work remained generally unknown to academic economists, but the profits identity was derived once again in 1935 by the Polish economist Michal Kalecki. Kalecki’s ideas about profits and business cycles influenced many of his students and associates at Cambridge University and have remained central to the studies of a minority of economists on both sides of the Atlantic.

Hyman Minsky and the Profits Perspective

The discovery of the profits equation did not complete the development of the Profits Perspective. The equation naturally connects to financial aspects of the economy, and Jerome Levy recognized in the late 1920s, for example, that falling asset prices and excessive debt could lead to the devastation of profits. It was not until the second half of the century that another economist, Hyman P. Minsky, a student of Kalecki’s work, explored and described the interrelationships between the financial condition of the economy and economic performance. Minsky departed from the neoclassical paradigm by insisting on greater realism, emphasizing three key points:

1. The financial sector, its institutions, and their interactions with the nonfinancial sectors must not be taken for granted or ignored. Events such as bank failures, crises of confidence, and speculative lending have enormous consequences for the entire economy. Balance sheets matter in macroeconomics.
2. The economy adjusts to new influences not instantaneously, as conventional theory assumes, but over time, and during that time people’s attitudes and behaviors may shift, changing the nature of the economy’s adjustment.
3. Contrary to the assumption of mainstream economics, every participant in the economy does not have “perfect information” or know the probabilities of all possible outcomes. Great uncertainty exists; individuals, firms, markets, and the public sector can be and often are profoundly surprised.

These three modest points shatter a central tenet of mainstream economics, that economies continually gravitate toward stable, full-employment equilibrium. Minsky achieved a much more realistic macroeconomic view by developing ways to analyze financial issues and incorporate them into a framework centered on the profits equation. He thus greatly enhanced the Profits Perspective, achieving a new way to understand and explain real-world economies’ obvious deviations from the prevailing equilibrium theory.

Minsky introduced his core ideas in the early 1960s and continued to expand them, becoming a respected but controversial figure among academics and winning enormous respect among the top Wall Street economists of the 1970s and 1980s. The Levy, Kalecki, and Minsky threads converged in 1990 when Minsky joined The Jerome Levy Economics Institute, where he remained until his death in 1996. That convergence is reflected in the work of the Jerome Levy Forecasting Center.

“The Doughty Maverick” and the Beginning of Industry Forecast

Jerome Levy’s elder son, S Jay Levy, had begun forecasting by the end of World War II. In 1949, with the encouragement of Jerome’s younger son Leon, Jerome and Jay began publishing a monthly analysis of the economy, Industry Forecast. Jerome largely turned over the analysis to Jay, but remained involved until his death in 1967. Jay Levy gained recognition on Wall Street and in the business press for his uncanny ability to predict business cycle peaks and troughs. After many years of citing and praising his record, Barron’s dubbed him the “doughty maverick” in 1967. In 1976 Jay’s son David became involved in the forecasting operation, joining it full time in 1978. Through Industry Forecast and their consulting firm, Levy Economic Forecasts, the two Levys continued the tradition through 1990.

The Profits Perspective Grows in Exposure

In 1986 Leon Levy financed the establishment of the Jerome Levy Economics Institute of Bard College, an independent, not-for-profit, nonpartisan economic policy research organization. In 1991 the forecasting operation ended as a private business and became, for the next ten years, the Levy Institute Forecasting Center. This move reflected the Levy family’s long-standing interest in promoting deeper understanding of economics, and over the course of the decade the Levy Institute Forecasting Center was able to introduce thousands of policy-makers, academic economists, students, journalists, and businesspeople to the Profits Perspective. Industry Forecast, which was expanded and renamed The Levy Institute Forecast from 1997–2000, turned 50 years old in 1999.

The Latest Chapter

The Levy Forecasting Center began its second fifty years with a significant change in direction. In 2001, it separated from the Levy Institute and returned to the for-profit sector, now focusing entirely on consulting and research services for major clients. Subscriptions ceased to be available to the general public, and publications were enhanced, expanded, and oriented toward client needs to accompany the expanding consulting activities.

Today, the Jerome Levy Forecasting Center continues to produce powerful and unique analysis for its clients. Having passed a major secular turning point, the apex of what David Levy, now chairman, has dubbed the era of “the big balance sheet economy,” the financial insights from the Profits Perspective are more important than ever. Robert King serves as Director of Research, with more than a decade’s experience utilizing the profits approach. Jay Levy followed the economy as senior counsel until his death in 2012, sharing the insights he had developed during more than six decades of maverick economic analysis and forecasting.

Profiting from Insights Over the Decades

The Jerome Levy Forecasting Center’s oldest client is the Levy family. Three generations of the Levy family have used the Profits Perspective for their own business and investment activities. Some highlights:

• 1917 to 1929: Jerome Levy uses the profits equation to successfully manage his wholesale goods business through numerous key shifts in the economy, including aggressive moves to acquire inventories in 1917, liquidate merchandise in 1920, and liquidate his business in 1929 ahead of the stock market collapse.
• Post World War II: Based on S Jay Levy’s insights from the Profits Perspective, Leon Levy goes to Wall Street with tremendous optimism about the U.S. economy’s prospects. When hiring members of Oppenheimer & Company’s research staff in the early 1950s, he makes it a rule not to hire anyone old enough to remember working during the depression because they would not be bold enough. Oppenheimer becomes a great Wall Street success story.
• Throughout the postwar era: S Jay Levy, heir to Jerome as family economist and forecaster, successfully speculates in the stock market, commodities, bonds, and interest rate futures and options, with 90% of his insights coming directly from his economic research.
• 1980s and early 1990s: Odyssey Partners (including Leon Levy, Jack Nash and others from Oppenheimer) capitalizes on major cyclical bond plays based entirely on Jay’s and his son David’s forecasts, setting firm records for profitability.
• 1991: David and Jay are serving on the Board of a not-for-profit organization financed by Leon Levy. David has been speculating in options on eurodollar futures, and Leon asks him to build and manage a $350,000 portfolio for the organization. The positions are liquidated a couple of years later with a value of over $9,000,000.
• 2003-2009: David predicts that the accelerating expansion will end with a severe financial mess and recession that will force the Fed to cut interest rates to the floor. He sets up the Levy Forecast® Fund in 2004 to capitalize on that move. The fund closed in March 2009, having produced a 500% net gain over the duration for its investors.