Forecasting Predicting

Forecasting Predicting

Forecasting, predicting the direction and extent of economic change from knowledge of the present and the past. Some long-term projections of needs, resources and levels of output extending ten and more years have been made on assumptions about the future size of the population, the proportion of the population in the work-force, the number of hours worked per year per man, productivity per man-hour and so on. These long-term projections are useful in providing a setting for Government policies, suggesting opportunities or needs for total demand to grow, and helping businesses such as oil companies and electricity undertakings which invest in very durable plant. But most forecasting is short-term, seldom extending beyond a year. Indeed, as it takes time to assemble, process and publish statistics so that they are necessarily out of date, skill is required to judge from recent past what is happening at any moment in the present.

Methods of forecasting fall into four main groups. First, a number of unsophisticated methods, such as listing the factors which are favourable and unfavourable to a particular development, and judging from the list where the most probable outcome lies or projecting trends into the future. The troubles with factor-listing are that it ignores interconnections between the forces at work and depends on intuition to assign 'weights' to the different factors. The mechanical projection of trends breaks down at the point where an accurate forecast is most needed, i.e. before a turning-point and a change of trend.

Secondly, 'barometric' methods try to identify changes which usually precede the change to be forecast. The prices of ordinary shares are a commonly used 'barometer' because they often fall some time before a business recession and begin to rise in advance of recovery. But share prices are subject to fluctuations which are independent of the state of business and may be in advance of general changes by varying periods. Other 'barometers' have been open to similar objections; but the extensive work done on 'barometric' statistical series by the National Bureau of Economic Research in the U.S.A. has provided indicators which usefully supplement other forecasting methods.

Thirdly, there has been an extensive development of opinion polling. In economic forecasting the most important poll is that carried out by the Federation of British Industries inquiring whether members' orders are up or down, whether they expect to authorize new expenditure on plant and machinery, whether stocks and work in progress axe up or down, whether the most important shortages are of orders, skilled labour, unskilled labour or capacity, and whether profit margins per unit of output are up or down. Such inquiries provide an indication of the direction of change, but they provide no clear basis for estimating its extent. Further, there is difficulty in assembling a representative sample of firms prepared to volunteer information.

Fourthly, there are methods of forecasting the likely performance of the economy as a whole which are based on national income theory and accounting. These methods range from intelligent guesses at the main totals of expenditure the balance of trade, consumption, investment and Government spending on goods and services and checks that these totals are compatible with one another and add up to a likely gross national product, to forecasting models in which the components of national expenditure depend upon sets of mathematical equations estimated statistically. The latter mix economics and statistics and are termed macro-models. These models have also been used to forecast the behaviour of individual segments of the economy, such as future sales of durable consumer goods.

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