An economic forecast is an estimate of future economic trends. It is usually based on historical data and the use of various methodologies. Economic forecasts are used for a variety of purposes, including business planning and predicting future demand for products. Economic forecasts are also used by government agencies to make policy decisions.
Economic forecasting typically starts with a broad analysis of the general economy. Then, specific industry factors are considered. For example, lumber sales may correlate fairly directly with housing construction and total consumer spending, and manufacturers who produce nondurable consumer goods often have to take into account a wide range of factors such as changes in inflation, interest rates and economic policies.
Long-range forecasts require special considerations such as changes in the population’s age composition and patterns of consumption. For example, a shift in the average age of the working-age population can have a profound impact on both consumption and labor supply and demand.
Even the most thorough research and analysis will not completely eliminate the possibility of error in an economic forecast. The most common errors are due to judgment and bias. Judgment can be based on experience and understanding but may also reflect unconscious or unrecognized biases. It is essential that any judgment applied to a forecast be clearly defined and understood so that anyone using it will know how the results were affected by the analyst’s own beliefs and preferences. In addition, forecasts based on judgment cannot be subjected to the same checks that are applied to those based on more objective statistical methods.