An economic forecast is a prediction of the state of the economy over a period of time, such as a quarter or year. It involves using models based on input data and assumptions to compute the behavior of one or more variables such as inflation, interest rates or GDP growth. Forecasts may be based on mathematical models or may be derived from expert judgment. Some methods for creating forecasts include econometric models, consensus, economic base analysis, shifting share analysis and input-output analysis.
Forecasters must also make many assumptions in preparing economic forecasts, particularly over longer periods of time. Typical assumptions include the effect of war and peace, population trends, technological change and changes in financial institutions and policies. For example, a long-range projection of a country’s economic growth is likely to include a projection of future military spending, which could reduce consumer spending and increase government expenditure. Likewise, in the case of a company’s business expansion plan, the introduction of new products will likely have an impact on consumer spending.
The congressional budget office, or CBO, prepares a long-range economic forecast each spring as part of its analysis of the President’s proposed budgetary changes. This includes projections of spending and revenues under current law, known as the baseline projections, which provide a benchmark against which the impact of proposed changes can be measured. The work of the CBO’s research staff has uncovered systematic bias among professional, private-sector economists in their estimates of gross domestic product (GDP). This was accomplished by developing innovative methodologies to identify these forecasters’ political affiliations through their campaign donations, voter registration and employment history.