Macroeconomic Forecasts

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ABSTRACT

I have been challenged to compare the forecasts of three different institutions. Once the forecasts were assembled I researched the reasons why there may be differences between the institution’s forecasts. I have also discussed the implications of these forecasts on three planning issues within the organization. My findings and recommendations of changes to these planning issues in order to minimize potential risks or maximize opportunities follow in the paper below.

Macroeconomic Forecasts

Factors such as inflation, unemployment, consumer spending and the overall level of output in the economy are covered by forecasts such as those put out by the government and financial institutions. Predictions are made and published regularly by governments throughout the West and private sector institutions. The results of the forecasts are in turn used as inputs to significant policy decisions, such as setting interest rates and deciding monetary policy. Additionally commercial businesses are also influenced by these forecasts regarding the scale of their commercial operations.




I have gathered three separate forecasts published by three different institutions and compared the results of these forecasts. The forecast findings are as followed

Real GDP

00 Annual 004 Annual Source

.5 4 The Conference Board Inc

.7 4. Wachovia Economics Group

.5 .6 Congressional Budget Office



Unemployment Rates

00 Annual 004 Annual Source

6.0 5. The Conference Board Inc

6.0 5.5 Wachovia Economics Group

5. 5.7 Congressional Budget Office

CPI Inflation

00 Annual 004 Annual Source

. 1. The Conference Board Inc

. .5 Wachovia Economics Group

. . Congressional Budget Office

Month Treasury Bill

00 Annual 004 Annual Source

0. 1.6 The Conference Board Inc

1.0 1. Wachovia Economics Group

1.4 .5 Congressional Budget Office

10 Year Treasury Note

00 Annual 004 Annual Source

4.14 4.84 The Conference Board Inc

4.1 5. Wachovia Economics Group

4.4 5. Congressional Budget Office



Although the above forecasts are very similar, there are slight differences in what they reported. There are some reasons as to why there are differences in the respective statistics prepared by the forecasters.

As the track record shows, forecasters collectively tend to err during periods that include either turning points in the business cycle or significant shifts in major economic trends. During these times it leaves more room for variances between each institutions forecast. Differences in the consumer price index series can be a result of which CPI is calculated. There are different series, one is known as the CPI-W (the price index for urban wage earners and clerical workers). A second, broader consumer price index series is the CPI-U (the price index for all urban consumers). CBO bases its inflation forecast on the CPI-U, a more widely cited measure of inflation and the one now used to index federal income tax brackets. Although annual fluctuations in the CPI-U and CPI-W are virtually indistinguishable, the indexes differ in some years. Other institutions may use the CPI-W to measure inflation, which could lead to slight differences in the forecasts.

CBO used monthly data published by the Board of Governors of the Federal Reserve System to calculate two-year averages of nominal short- and long-term interest rates. The forecasts of short-term interest rates were compared using historical values for two measures of the interest rate on three-month Treasury bills the new-issue rate and the secondary-market rate. The Administration forecasts the new-issue rate, which corresponds to the price of three-month bills auctioned by the Treasury Department--that is, it reflects the interest actually paid on that debt. CBO forecasts the secondary-market rate, which corresponds to the price of the three-month bills traded outside the Treasury auctions. Such transactions occur continually in markets that involve many more traders than do Treasury auctions. As a result, the secondary-market rate provides an updated evaluation of short-term federal debt by the wider financial community. CBO likewise compared the various forecasts of long-term interest rates using historical values for two measures of long-term rates the 10-year Treasury note rate. The way the numbers are determined plays the biggest role in the accuracy of the data. Each institution ay use different numbers to arrive at their forecasts, which can lead to the variance between their forecasts. When a company bases business decisions on these forecasts there can be implications on the planning within the company when they are inaccurate.

The forecasts of the unemployment rates, inflation rates, and the GDP can have implications on the planning for a business. Unemployment forecasts can affect planning in that if unemployment is high there are usually more people out looking for jobs. If the demand for jobs actually exceeds the number of jobs available then there are more chances of getting a more qualified employee for less money. Many people are willing to settle for slightly lower salaries when jobs are hard to come by. Knowing the forecast for unemployment allows you to better prepare for what kind of job seekers you will see.

The inflation rates have a large effect on the business success and the pricing strategies we plan. If inflation drops, as predicted, then a price increase could be expected. Depending on the elasticity of the company this could be good or bad. In the case of my company, it is very elastic and responds greatly to price changes. The good news is that a price increase would actually help us to increase profits. It has been determined that if the prices were to increase then demand would continue to increase, thus increasing the profit. Knowing the forecast for the inflation rates it makes it easier to plan for any price increases or decreases.

A third factor that has implications on the company planning is the GDP. GDP is the total value of all final goods and services produced within the boundaries of a country. GDP is one of the most important barometers or indicators of the performance of the economy. Having an idea of what the forecasts are for the future economic performance can help a company prepare for things such as consumption, consumer spending and business investments. The implication of the GDP on planning is that when you can prepare for future spending and consumption you can prepare for the swings in demand and adjust supply accordingly.

Given these forecasts and the implications they have on planning I would make the recommendation to implement a price increase. Inflation is expected to decrease over the next couple of years. When inflation decreases there is usually a price increase. It has already been determined that a price increase would be a profitable decision regardless of the changes in inflation. As a result, I think that a price increase should be planned in order to maximize our profits. Also, with the expected increase in GDP we can assume consumer spending will be up and consumption will be up, which will also aid in maximizing our profits.

Inflation, unemployment, consumer spending and the overall level of output in the economy are all covered by forecasts that many companies rely on in order to plan for the future economic state. The government also uses forecasts in making decisions on policies, including monetary policies. These forecasts are an important part of business planning and have implications on the planning issues in the company or institution.



References

Conference Board Inc. Description of the Latest Issue. September ,00. Retrieved

September 10, 00 from http//www.conference-board.org/economics

Congressional Budget Office. The Budget and Economic Outlook. Retrieved

September 15, 00 from http//www.cbo.gov

Wachovia Securities. Monthly Economic Outlook. September , 00

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