What helps economists forecast the economy?

What helps economists forecast the economy?

Economic forecasting is the process of attempting to predict the future condition of the economy using a combination of widely followed indicators. The challenges and subjective human behavioural aspects of economic forecasting also lead private-sector economists to regularly get predictions wrong. Economic forecasts are geared toward predicting quarterly or annual GDP growth rates, the top-level macro number upon which many businesses and governments base their decisions with respect to investments, hiring, spending, and other important policies that impact aggregate economic activity. Forecasts are generally based on sample data rather than a complete population, which introduces uncertainty. The economist conducts statistical tests and develops statistical models to determine which relationships best describe or predict the behaviour of the variables under study. Business managers rely on economic forecasts, using them as a guide to plan future operating activities. Private sector companies may have in-house economists to focus on forecasts most pertinent to their specific businesses example, a shipping company that wants to know how much of GDP growth is driven by trade.

The Composite Index of Leading Indicators, otherwise known as the Leading Economic Index (LEI), is an index published monthly by The Conference Board. It is used to predict the direction of global economic movements in future months. The index is composed of 10 economic components whose changes tend to precede changes in the overall economy. Businesses and investors can use the index to help plan their activities around the expected performance of the economy and protect themselves from economic downturns. LEI is intended to give an overall indication of the near-term future performance of the U.S. economy. It includes key economic data that is logically connected to the economic conditions that influence things like consumer spending and business investment. For example, one component of the LEI measures new applications for unemployment benefits, which is thought to indicate increases or decreases in unemployment. Changes in unemployment, in turn, suggest changes in future consumer and business spending.  By combining data from multiple different sources into a composite index, the LEI can give a more comprehensive signal to help predict overall economic performance, as opposed to a single indicator. The Composite Index of Leading Indicators is a number used by many economic participants to predict what will happen with the economy in the near future. By analyzing the index in relation to the business cycle and general economic conditions, investors and businesses develop expectations for the future economic environment and can make better-informed decisions.

Yes, the Phillips curve is still useful in explaining the key economic performance measures: unemployment and inflation. Many economists believe that the Phillips curve is a very useful relationship because both inflation and unemployment are key measures of economic performance.  Interestingly, however, the system approach does not seem to forecast price inflation, as well as single-equation Phillips curve models do. As you can see, economists and policymakers are far from speaking with one voice on the usefulness and validity of the Phillips curve framework. The topic has been one of the most controversial ones in macroeconomics for a few decades now. Yet, the relationship between inflation and unemployment is probably one of the most important ones that macroeconomists think about.

Leading economic indicators can give investors a sense of where the economy is headed in the future, paving the way for an investment strategy that will fit future market conditions. Leading indicators are designed to predict changes in the economy, but they are not always accurate, so reports should be considered in aggregate, as each has its own flaws and shortcomings. Economists typically group macroeconomic statistics under one of three headings—leading, lagging, or coincident. Figuratively speaking, one views them through the windshield, the rear-view mirror, or the side window. Coincident and lagging indicators provide investors with some confirmation of where the market is and where it has been and are a good place to start because they help indicate where the economy might be heading. In order for an economic indicator to have predictive value for investors, it must be current, it must be forward-looking, and it must discount current values according to future expectations. Meaningful statistics about the direction of the economy start with the major market indexes and the information they provide about Example, Stock and stock futures markets; Bond and mortgage interest rates and the yield curve; Foreign exchange rates; Commodity prices, especially gold, grains, oil, and metals. Although these measures are crucial to investors, they are not generally regarded as economic indicators per se. This is because they do not look very far into the future—a few weeks or months at most. Charting the history of indexes over time puts them in context and gives them meaning. For instance, it is not terribly useful to know that it costs $10 to purchase one British pound, but it may be useful to know that the pound is trading at a five-year high against the dollar.

References

Gwartney, J. A., Stroup, R. L., Sobel, R. L., & Macpherson, D. A. (2018). Macroeconomics: Private and public choice (16th ed.). Retrieved from https://www.cengage.com

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Prior to beginning work on this discussion,

• Read Chapter 15 of Macroeconomics: Private and Public Choice.
  

  What helps economists forecast the economy?

What helps economists forecast the economy? Imagine you are presenting the index of the leading indicators concept to a small group of newly hired analysts. In a minimum of 200 words,

• Discuss the index of the leading indicators.
• Is the Phillips curve a helpful predictor? Why or why not?
• As a business person, how could you use this predictive macroeconomic information to help make business decisions? (Give specific examples.)

Again, your initial response should be a minimum of 200 words. Graduate school students learn to assess the perspectives of several scholars. Support your response with at least two scholarly and/or credible resources in addition to the text.