The economic forecast is a quantitative estimate of the future value of an economy’s output. The concept most frequently used is Gross Domestic Product (GDP), the monetary value of all finished goods and services produced within an economy’s borders. GDP is also sometimes referred to as national income.
Various methods are used to make economic forecasts. Some are mathematical in nature, others use relationships between contemporaneous economic variables as a predictive framework. These relationships are often derived from economic theory or from historical experience, or both. Regardless of the method used, an important aspect of making economic predictions is understanding the nature of uncertainty in the economy, and thus how to estimate the uncertainty in a forecast.
Many studies have found that some financial and macroeconomic series have significant predictive power for future economic activity. For example, the yield curve has a strong correlation with real GDP growth, and several studies have shown that short-run forecasts made using the yield curve outperform forecasts based on a variety of other series. These findings are summarized in the early work of Estrella and Hardouvelis (1991) and Stock and Watson (1993).
It is important to realize that, much like predicting the motion of large-body physical objects, economic forecasts can be highly subjective. Forecasts are heavily influenced by the type of economic theory that a forecaster subscribes to, which can lead to subjective or biased projections. Moreover, forecasters are often subject to pressure to play it safe and avoid bold projections that could damage their reputations.
About the Author
