An economic forecast is a prediction about how the economy will evolve over time. Economists make these predictions by analyzing available data, surveying businesses, and applying a variety of analytical techniques.
Forecasts play a crucial role for government officials, who use them to help set fiscal and monetary policy. This helps them decide which spending and tax parameters to implement and how much to borrow. Many private firms also produce forecasts for their clients, and a number of highly successful consulting firms have been formed to do this work.
But economic forecasts are notoriously difficult to get right. In part, that’s because they depend on the human factor—the education and working experience of the forecaster influence both the accuracy and boldness of their predictions. Also, political events can dramatically shift the outlook for a country or region.
In addition, the type of economic theory that a forecaster subscribes to dictates which indicators they will pay more attention to. For instance, if an economist believes that business activity is determined by the supply of money, they’ll likely give more weight to indicators such as GDP and unemployment rates.
As a result, economic forecasts are often biased in one direction or another. This can be a serious problem, because the biases can lead to investors making suboptimal decisions. In addition, the complexity of economic trends and the idiosyncrasies of individual industries make it hard to find consensus among experts. For these reasons, we believe it’s important to take a skeptical view of any economic forecast.