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 to think tanks or 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 the u s tax cuts and jobs act of 2017 that projected a much smaller fiscal deficit with drastic implications to the economy than independent economists estimated limitations of economic forecastingeconomic 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 the federal 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 manager at 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 considerationsinvestors 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 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 