An economic forecast is a prediction of future economic activity. Economic forecasts are widely used in business to develop production and financing plans. They are also important to government officials as they decide what types of fiscal and monetary policies to implement. Almost all governments produce economic forecasts and most of these are made by staff economists who specialize in economic analysis. They are often based on standard statistical techniques, but may include some subjective judgment as well.
To prepare an economic forecast, the economist first gathers information about a number of relevant variables. This includes historical data on the variable of interest and its trend, as well as current estimates of its future value. This information is then analyzed to determine the relationships between one or more independent variables and the dependent variable, usually by using regression analysis.
The results of this research can be used to create a model that will predict future behavior. There are many models available and new ones are being developed constantly. Some of the more advanced time series models use information from multiple sources to predict a series and have been shown to improve forecasts compared to simple autoregressive and linear models.
The forecasting process is especially difficult for companies that manufacture durable goods such as automobiles and industrial equipment, and for the suppliers to these industries. These businesses are impacted by changes in general economic conditions that are not always immediately apparent. For example, sales of automobiles can fluctuate wildly from one year to the next due to a variety of factors. Consequently, these industries require a large amount of forecasting effort.