Page 240 - Encyclopedia of Business and Finance

eobf_E 7/5/06 3:00 PM Page 217

Economic Analysis

makers know that it is important to gain some idea of These four methods are not mutually exclusive.
what economic conditions will be in months or years Combinations of methodologies are perhaps more com-
ahead. As a result, they either use the collected data to pre- monly used in formulating forecasts today.
pare their own forecasts or they use economic forecasts
that have been prepared by experts who monitor eco- Step 4—Interpret the Economic Data. The fourth step
nomic activity. Regardless of its origin, the forecast itself is requires decision makers to examine, assess, and interpret
essential if the decision maker is to recognize opportuni- the economic data collected and the subsequent forecast
ties and threats posed by the economic environment. generated from the economic data. Decision makers eval-
Thus, using economic data to predict the future is the uate the data and forecast for accuracy, try to resolve
third step in the process. inconsistencies in the information, and—if it is war-
Economic forecasting can be and often is a compli- ranted—assign significance to the findings. By analyzing
cated process. While accurate, relevant data are the basis economic data and forecasts, decision makers should be
for predictions, forecasters must be careful not to gather able to recognize and identify potential opportunities and
so much data that sheer volume makes analyzing impossi- threats linked to economic changes and developments. As
ble. Forecasts may be classified as short term (with spans a result, they are better able to understand the influence
or distances to the target period of up to one or two years), that the economy is exerting and better prepared to make
intermediate (two to five years), and long term (relating to decisions and plan strategy. The process, however, should
more persistent developments and distant occurrences). not be viewed in an oversimplified manner. Today’s global
Because of the possibility of unforeseen events occurring economic links make economic forecasting and analysis
over a long interval, short-term forecasts are usually more especially complex.
accurate than long-range ones. There are four principal
techniques used to forecast: Step 5—Monitor Intervening Forces. Then, too, inter-
vening forces can and do influence economic activity.
• Judgmental forecasting is the oldest and still the Such forces can shift or alter economic performance and
most important method of forecasting the future. trends and must be anticipated by decision makers. Thus,
Judgmental forecasters often blend several forecast- anticipating and monitoring the government’s manipula-
ers’ judgments together to produce a forecast. This tion of two powerful sets of economic instruments, fiscal
may be a complicated process, since various “Del- policy and monetary policy, becomes the fifth step in the
phic” methodologies are used to integrate inputs process. Fiscal policy is the government’s combined
from people experienced in forecasting. spending and taxation program, while monetary policy
• Indicator forecasts are nearly as old as judgmental represents actions by the Federal Reserve System that
forecasts. This technique requires that economic affect the supply and availability of money and credit. The
indicators be used to estimate the behavior of two arms of policy can work to supplement each other
related variables. The index of leading indicators when powerful stimulus or restraint is sought. Or they can
published by the Commerce Department is the work in beneficial or damaging opposition, when one or
best-known overall measure, but decision makers the other is driven off-course into excessive stimulation or
can use many other indicators for their own pur- excessive restraint. Observers can often anticipate the gov-
poses. ernment’s implementation of fiscal and/or monetary poli-
cies based on prevailing economic conditions. The
• Time-series techniques use trend projections of past
outcomes of such implementations must be considered by
economic activity to extend into the future. Project- analysts.
ing is done by plotting data for the past years on a
chart and, from the latest data, extending a line into Step 6—Use the Economic Analysis for Decision Mak-
future time periods that follows the pattern of prior ing. Finally, decision makers use the results of an eco-
years.
nomic analysis for decision making. Astute decision
• Structural models of the economy try to capture the makers recognize that economic forces are uncontrollable
interrelationships among many variables, using sta- and that current strategies may need to be adjusted to
tistical analysis to estimate the historic patterns. cope with or overcome obstructing economic changes.
Large models of the U.S. economy, used by major They approach with caution opportunities and threats
forecasting firms and the government, may have up discovered as a result of economic scanning and analysis.
to a thousand interlinked equations. Simple models They pursue a proactive approach, however, knowing that
used by individual organizations, however, can have an economic analysis enables them to choose from alter-
as few as one equation. native approaches how to employ scarce or uncommon

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 217