Creating and assessing economic forecasts are key inputs into the decision making of central banks and fiscal authorities. They range from judgmental methods that rely on the expertise of individual forecasters to adjust the outputs of a suite of models to dynamic stochastic general equilibrium (DSGE) models that use modern economic theory to produce a forecast disciplined by economics. Most countries and regions conduct surveys of professional forecasters to assess the accuracy of their forecasts.
The concept of output most commonly forecasted is gross domestic product (GDP) or its equivalent, gross national product (GNP). It measures the monetary value of all the finished goods and services produced within a country’s borders.
McCracken said businesses rely on economic forecasts to make decisions about investment and production. For example, if a business is forecasting that sales will increase, it may want to consider adding extra inventory or holding a hiring event to attract unemployed workers. Businesses also rely on these types of economic indicators to help determine which financial policies to implement, such as whether or not to raise or lower interest rates.
Research on forecasting errors shows that the accuracy of a forecast declines over time, especially as you approach a recession. This is because the economy starts behaving in atypical ways at that point, according to McCracken. For example, unemployment rates tend to be fairly sticky and therefore relatively easy to predict over short horizons, but when you get close to a recession they become more volatile.