An economic forecast is a prediction about how prosperous different sectors of the economy may be in the future. This process uses historical data and indicators, like inflation or unemployment rates, to make projections. It also considers potential risks, such as a fiscal crisis or energy price shocks.
Economic forecasts are important for policymakers. They help the Fed’s FOMC decide whether to adjust the target range for the federal funds rate. In addition, they help businesses make investment decisions. For example, if you anticipate that your company will need to increase production, then you can start planning for the necessary equipment or workers. You may even be able to reduce costs by building the new plant earlier.
McCracken points out that some indicators are harder to forecast than others, such as financial series like stock market prices or interest rates. These are hard to predict because they are highly volatile. Other indicators, such as inflation or GDP growth, are easier to predict over short horizons.
For example, the Blue Chip, a poll of top forecast economists from banks, manufacturing industries and brokerage firms, publishes forecasts for several macro series including real GDP growth. These forecasts are published monthly and include individual member forecasts, the average (or consensus) of these forecasts and a diffusion index that shows how much respondents’ expectations have changed over time.