Center for Business and Economic Research - Ball State University


CBER Data Center
Projects and PublicationsEconomic IndicatorsWeekly CommentaryCommunity Asset InventoryManufacturing Scorecard

About

Commentaries are published weekly and distributed through the Indianapolis Business Journal and many other print and online publications. Disclaimer

RSS Feed

Disclaimer

The views expressed in these commentaries do not reflect those of Ball State University or the Center for Business and Economic Research.

Recent

Two Key Economic Lessons in One BillHoosiers face trade-offs and opportunity costs in the wake of SEA1.

Time to Fix Economic Development PolicyAllocating tax dollars to land development won’t cause economic growth.

The Unanticipated Effects of SB1Businesses, governments and households may all feel the effects.

The Stupidest of PoliciesThis whipsawing of tariff rates has unnerved financial markets, which on Wednesday, were toying with a liquidity crisis.

View archives

Top Tags

jobs and employment 261
economics 201
state and local government 188
education 186
economic development 171
indiana 171
budget and spending 145
taxes 144
law and public policy 142
workforce and human capital 139
Browse all tags
Reporter / Admin Login

January 3, 2011

Forecasting the Year

New Year’s is a time to reflect upon the passing of a year and what the coming year might bring.  For an economist of a certain stripe, that means thoughts of forecasts.  I would like to explain how and why economists forecast the economy.

Forecasts are primarily used as a tool to begin, not end conversations about business and government matters.  It is easier to craft a budget or plan production from a forecast than to argue about a starting point.  So a forecast can be very useful, and is worthy of serious effort.

 It should come as no surprise that most economists have nothing to do with forecasts.  Like any discipline, the field is too broad to develop technical expertise in everything.  

To begin with, forecasting the economy is very different than estimating the effect of a policy, like a change in tax rates or regulations.  Economists have a much better grasp on these matters for a variety of reasons, not least of which is a relative abundance of data and experience.  There have been four recessions in the past thirty years, and about a bazillion tax rate changes at federal, state and local levels.  It is literally akin to the problem of forecasting a hurricane season versus rain this afternoon.

Most forecasts today use a mix of two approaches.  Both involve constructing a set of mathematical equations for which data must be available.  One tactic to construct equations allows a forecaster to create relationships from observing recurring economic events, without the need to know anything about causation.  The second method involves linking known relationships between different types of economic activity.  For example, as gas prices rise, fewer cars are sold.  In both cases, the strength of the relationships is based on historical evidence, with more recent experience carrying heavier weight.  The models economists use are series of these types of equations which are solved to come up with a prediction of the future. 

These forecasts are pretty straightforward, and most of us who dabble in this dark science actually use a trick of forecasting past events as a tool for assessing how good the model actually works. Not surprisingly, there’s a lot of competition in forecasting.  Anyone who can build a model to predict the last recession, given what was known before it started, will become very rich. 

These approaches have some critics.  Better data would yield better models of course (that is what experimental economists are busy creating).  Also, economists have long been criticized for assuming that people are rational.  But, one need attend only one faculty meeting to know that economists have a very unusual definition of rationality.  Economists are happy if people respond to price changes given the information that is available to them. This is a low bar for social interactions, but works well for forecasts.

 So, at least the ways economists predict growth is at least a little less murky.  Now, if only it were more accurate.

Link to this commentary: https://commentaries.cberdata.org/548/forecasting-the-year

Tags: forecast


About the Author

Michael Hicks cberdirector@bsu.edu

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

© Center for Business and Economic Research, Ball State University

About Ball State CBER Data Center

Ball State CBER Data Center is one-stop shop for economic data including demographics, education, health, and social capital. Our easy-to-use, visual web tools offer data collection and analysis for grant writers, economic developers, policy makers, and the general public.

Ball State CBER Data Center (cberdata.org) is a product of the Center for Business and Economic Research at Ball State University. CBER's mission is to conduct relevant and timely public policy research on a wide range of economic issues affecting the state and nation. Learn more.

Terms of Service

Center for Business and Economic Research

Ball State University • Whitinger Business Building, room 149
2000 W. University Ave.
Muncie, IN 47306-0360
Phone:
765-285-5926
Email:
cber@bsu.edu
Website:
www.bsu.edu/cber
Facebook:
www.facebook.com/BallStateCBER
Twitter:
www.twitter.com/BallStateCBER
Close