Forecasting in an Uncertain Economy

I friend recently asked if I was still able to forecast the economy in such uncertain times. Gee, maybe someone else wonders that same thing.

Economic forecasting goes on because business goes on. Companies must make decisions about the future. Invest in new equipment? Hire more workers? Pay down debt? Take out more debt? Those decisions all require a view of the future. Anyone who says that he runs a business without an economic forecast is fooling himself. There may not be an explicit economic forecast tab in an official planning notebook, but the CEO has an idea of what he or she thinks will happen.

Some business leaders try to prepare for a range of possible economic futures. That’s wise, but planning for everything under the sun is impossible. Some scenarios are more likely than others, and certain scenarios are logically inconsistent (economic collapse in China and India combined with rising steel prices and a falling dollar, for example).

My job is to help business leaders understand the possible futures. There’s one path that is most likely, in my mind, but other paths are possible and warrant contingency planning. Some possibilities are very unlikely.

Where planning gets fun is taking the next step: what should we do under each scenario. You will often find that some tactical action steps are robust: they should be taken under any of the most likely scenarios. Other steps hinge crucially on the economy. For these steps, a good economic early warning system is needed.

Yes, the economy is uncertain. But looking back on my forecasting experience, I think that perhaps the best forecasts come during the least certain times. That’s because the worst forecasts are made when the future looks obvious.