An economic forecast is an attempt to anticipate future trends in economic variables. These attempts are used in a variety of applications, including setting monetary and fiscal policies, state and local budgeting, financial management and engineering, among others. There are a number of different methodologies for making such predictions, ranging from econometric models to simple judgmental methods.
Most methods of making economic forecasts assume that relationships between a set of economic variables are linear and that those relations will remain the same in the future. For instance, forecasting the percentage of sales that a company’s costs of goods sold will account for is a straightforward exercise in linear regression: simply multiply the company’s historical cost of goods sold by its historical growth rate and then divide by 100 to get the company’s forecasted sales percentage.
Other econometric approaches involve estimating patterns in past behavior and then applying them to the expectation of future trends. While these methods can be very successful, they also require a substantial amount of knowledge about why the economic variable behaves in the way that it does. In many cases, the researchers who use these techniques don’t have enough time to undertake such a detailed study.
Moreover, even when such mathematical modeling is used, there are many situations in which simple judgemental forecasts will produce results that are superior to those of the models. Indeed, studies such as those of Wieland and Wolters find that judgmental-based forecasts outperformed model-based ones in the 2008-2009 recession and are similar to them at other times.
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