Economic forecasts are a key part of economic analysis. They are used by businesses, governments and stock market analysts to help determine their strategies, multi-year plans and budgets for the upcoming year. They are also used to evaluate and compare investment opportunities.
While the basic structure of a forecast is usually determined by economic theory and standard statistical techniques, judgment often plays an important role. For example, if current circumstances are unusual or extraordinary, it may be appropriate to modify a forecast developed using more objective techniques to take into account the special circumstance.
Similarly, the method used to make forecasts of individual components of the economy can differ. Consumer spending, for example, was once believed to be relatively easy to forecast because it was based on the principle that consumers save only about 94-95 percent of their income and spend the remainder. This simple rule of thumb still works well for estimating the amount of consumer spending that is likely to occur over an extended period of time. By contrast, the forecasting of private investment is more difficult because it reflects thousands of individual and corporate decisions that are not recorded publicly (as government budgets are) or subject to standard statistical analyses.
In addition, over longer periods of time, long-range forecasts must consider many more factors than short-range forecasts. For example, demographic trends such as the size of the population and shifts in its age composition can have significant effects on consumption and government spending. Moreover, the introduction of new products or technologies may have a large impact on the overall economy.