What Is Economic Forecasting?

Economic forecasting is the process of attempting to predict future conditions of the economy using a combination of 澳洲幸运5开奖号码历史查询:indicators.

Forecasting involves the building of statistical models with inputs of several key variables, typically in an attempt to come up with a future 澳洲幸运5开奖号码历史查询:gross domestic product (GDP) growth rate. Primary economic indicators include inflation, iওnterest rates, industrial production, consumer confidence, worker productivity, retail sales, and unemployment rates.

How Economic Forecasting Works

Economic forecasting has been around for centuries. However, it was the 澳洲幸运5开奖号码历史查询:Great Depression of the 1930s that g♑ave birth to the levels of analysis ✃we see today.

After that disaster, a greater onus was placed on understanding how the economy works and where it is heading. This led to the development of a richer array of statistics and analyticalꩵ techniques.

Economic forecasts are geared toward predicting quarterly or annual GDP growth rates, the top-level macro number upon which many businesses and governments base their decisions with respect to 澳洲幸运5开奖号码历史查询:investments, hiring, spending, and other important policies that impact aggregate economic activity. 

Business managers rely on economic forecasts, using them as a guide to plan future 澳洲幸运5开奖号码历史查询:operating activities. 澳洲幸运5开奖号码历史查询:Private sector companies may have in-house 澳洲幸运5开奖号码历史查询:economists to focus on forecasts most pertinent to their specific businesses. For example, a shipping company that wants to know how much of GDP growth is driven by trade. Alternatively, they might rely on 澳洲幸运5开奖号码历史查询:Wall Street or academic economists, those attached to 澳洲幸运5开奖号码历史查询:think tanks or boutique consultants. 

Understanding what the future holds is also important for government officials, helping them to determine which fiscal and 澳洲幸运5开奖号码历史查询:monetary policies to implement. Economists employed by federal, state, or local governments play a key role in helping policymakers set spending and tax parameters.

Since politics is highly partisan, many rational people regard economic forecasts produced by governments with healthy doses of skepticism. A prime example is the long-term GDP growth forecast assumption in the 澳洲幸运5开奖号码历史查询:U.S. Tax Cuts and Jobs Act of 2017 that projected a much smaller 澳洲幸运5开奖号码历史查询:fiscal deficit—w✅ith drastic implications to the economy—than independent economists estimated.

Limitations of Economic Forecasting

Economic forec♚asting is often described as a flawed science. Many suspect that economists who work for the White House, for instance, are encouraged to produce unrealistic projectioꦏns in an attempt to justify legislation.

The challenges of economic forecasting are not limited to the government. Private-sector economists, academics, and even the 澳洲幸运5开奖号码历史查询:Federal Reserve Board (FSB) have iss🔥ued economic forecasts that were wildly off the maꦅrk.

In particular, economic forecasters have a history of neglecting to foresee crises. According to Prakash Loungani, assistant director and senior personnel and budget manager at the 澳洲幸运5开奖号码历史查询:International Monetary Fund (IMF), economists failed to predict 148 of the past 150 澳洲幸运5开奖号码历史查询:recessions.

Loungani said this inability to spot imminent downturns is reflective of the pressures on forecasters to play it safe. Many, he added, prefer not to stray away from the con⛎sensus, mindful that bold projections could da෴mage their reputations.

Special Considerations

Investors should also not overlook the subjective nature of economic forecasting. Predictions are heavily influenced by what type of economic theory the forecaster buys into. Projections can differ considerably between, for example, one economist who believes 澳洲幸运5开奖号码历史查询:business activity is determined by the 澳洲幸运5开奖号码历史查询:supply of money and another who maintains that hefty government spending is bad for t🌞he economy.

M𒅌any conclusions do not come from objective economic analysis. Instead, they are regularly shaped by personal beliefs on how the e🌜conomy and its participants work. That inevitably means that the impact of certain policies will be judged differently.

The Bottom Line

Economic forecasting is a process by which policymakers, businesses, and individuals can predict future characteristics of the economy. Forecasting is based on an analysis of key metrics and indicators, such as unemployment, inflation, sales, consumer confidence, and more. Forecasting is vulnerable to bias and subjectivity. Therefore, economic forecasting can occasionally fail to properly judge🦄 potential economic headwinds or to accurately predict the onset of financial crises.