Economic forecast is the process of creating a prediction of future economic activity by using historical data and a model. The forecast can include any number of variables, including unemployment, inflation, GDP and investment spending. Forecasters use a variety of models to create their projections, such as econometric models and consensus forecasts. They also may rely on information graphics to help explain their predictions.
Many businesses use forecasting to inform their decision-making processes and policies. For example, if a company sees that unemployment is high, they might hold a hiring event to recruit more employees. Government officials also rely on economic forecasts when creating fiscal and monetary policy. However, the accuracy of these forecasts can vary.
Forecasts are notoriously difficult to create. They are often based on incomplete or outdated information and can be revised with new information as it becomes available. This makes it important to use the most current information when creating a prediction of future economic activity. For instance, the initial estimates of gross domestic product (GDP) are released the month after each quarter ends, and then revised later. A graph from the St. Louis Fed’s archival database ALFRED illustrates the differences between the first, second and third estimates of GDP for a given quarter.
Another difficulty in predicting the economy is that it is impossible to know how long it will take for the economy to reach full employment, or “equilibrium.” In order to make a long-range forecast of economic activity, analysts must estimate the growth rate of the population of working age, the rate of productivity increase and the number of people who are out of work.