An economic forecast is an attempt to predict the direction and amount of future economic activity. Various methodologies are used to generate these predictions, including time series models and econometric models. These methods vary in complexity, with some employing simple statistical analysis and others utilizing advanced mathematical techniques.
The process of creating an economic forecast begins with obtaining input data on a number of economic variables. These variables may include gross domestic product (GDP), employment, inflation, and monetary policy.
After this information is collected, historical relationships are determined between the variables under consideration. These relationships are often discovered through the use of regression analysis, a statistical technique that determines how one variable influences another.
Observations made during the course of an economy’s expansion or contraction are also factored into the forecast. In general, the more precise the observations that are made, the better the results of the forecast will be.
Finally, a model is chosen and applied to the current economic conditions in order to produce a predicted outcome. The type of model chosen is heavily influenced by the forecaster’s personal theory on how the economy works, which can result in subjective or biased forecasts.
Businesses rely on economic forecasts to make business decisions that can impact their financial health. For example, if an economist states that consumer spending is expected to slow down, many companies may decide to hold off on hiring new employees or purchasing any equipment. Additionally, government officials rely on economic forecasts when making decisions related to fiscal and monetary policies.