What Is Economic Forecasting?
Economic forecasting is the process of attempting to predict future conditions of the economy using a combination of indicators.
Forecasting involves the building of statistical models with inputs of several key variables, typically in an attempt to come up with a futuregross domestic product(GDP) growth rate. Primaryeconomic indicators include inflation, interest rates, industrial production, consumer confidence, worker productivity, retail sales, andunemployment rates.
Key Takeaways
- Economic forecasting is the process of attempting to predict future conditions of the economy using a combination of widely followed indicators.
- Government officials and business managers use economic forecasts to determine fiscal and monetary policies and plan future operating activities, respectively.
- Since politics are highly partisan, many rational people regard economic forecasts produced by governments with healthy doses of skepticism.
- The challenges and subjective human behavioral aspects of economic forecasting also lead private-sector economists to regularly get predictions wrong.
How Economic Forecasting Works
Economic forecasting has been around for centuries. However, it was the Great Depression of the 1930s that gave 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 analytical 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 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 operating activities. Private sector companies may have in-house 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 Wall Street or academic economists, those attached tothink tanksor boutique consultants.
Understanding what the future holds is also important for government officials, helping them to determine which fiscal and 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 theU.S. Tax Cuts and Jobs Act of 2017that projected a much smaller fiscal deficit—with drastic implications to the economy—than independent economists estimated.
Limitations of Economic Forecasting
Economic forecasting is often described as a flawed science. Many suspect that economists who work for the White House, for instance, are encouraged to produce unrealistic projections in an attempt to justify legislation.
The challenges of economic forecasting are not limited to the government. Private-sector economists, academics, and even theFederal Reserve Board(FSB) have issued economic forecasts that were wildly off the mark.
In particular, economic forecasters have a history of neglecting to foresee crises. According to Prakash Loungani, assistant director and senior personnel and budget managerat the International Monetary Fund (IMF), economists failed to predict 148 of the past 150 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 consensus, mindful that bold projections could damage 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 business activity is determined by the supply of money and another who maintains that hefty government spending is bad for the economy.
Important
A forecaster’s personal theory on how the economy works dictates the type of indicators to which they will pay more attention, potentially leading to subjective or biased projections.
Many conclusions do not come from objective economic analysis. Instead, they are regularly shaped by personal beliefs on how the economy and its participants work. That inevitably means that the impact of certain policies will be judged differently.
What Is the Economic Forecast for 2024?
There are a wide range of economic forecasts for 2024 given the divergent views that different experts have on the economy. One organization that makes noteworthy economic forecasts is the Organisation for Economic Co-operation and Development (OECD), an intergovernmental forum of 38 high-income countries, including the United States, the United Kingdom, and Australia, among others. Per OECD, global GDP is projected to grow at a rate of 3.1% in 2024 and 3.2% in 2025
How Do You Make an Economic Forecast?
Economic forecasts are grounded in a range of important indicators, including both macroeconomic and microeconomic data. This can include everything from inflation, interest, unemployment, and productions, as well as prices for goods and services.
How Can Economic Growth Be Measured?
The most popular metric used to track economic growth is the gross domestic product (GDP). The rate at which GDP grows on a year-to-year basis is a common indicator used to measure economic growth over time.
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.
