Sunday, April 15, 2012

Navigating the economic forecasting mess

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It is extremely difficult to keep a level head in the face of current economic forecasting and reporting. One minute it’s all doom and gloom, the next things suddenly seem better.

The gyrations have been quite remarkable, beyond anything in my own experience. They have also continued for some time now - since the onset of the global financial crisis, in fact. Measures of consumer and business sentiment have followed the gyrations.

From a practical business perspective, both economic forecasting and reporting have become a burden. They affect, but do not inform.

So how do you navigate your way through this mess? The first thing to remember is that forecasts are just that - forecasts. In all cases, they rely on past data and incorporate assumptions about the structure of the economy and of the relations between different types of economic activity.

But there is a further problem. Most prominent business economists work for financial institutions. Because their primary internal role is to provide advice on what might happen in financial markets, the economic reporting that follows from their public utterances is also markets’ focused. This means that both forecasts and reporting often do not provide the type of longer term information most businesses require.

Business wants answers to questions like: What’s happening to my market place or to my costs? By contrast, many forecasters and reporters are concerned with the immediate market impacts of changes in longer term expectations. How will it affect the dollar or shares, or the financial markets in general?

Perhaps the best course may just be to ignore the whole lot unless there is something there that seems directly relevant to your business! If this sounds extreme, consider all the reporting of interest rates over the last twelve months. How much of that has actually been in any way useful to the majority of Australian businesses?

I am not saying that you should ignore economic conditions or all economic reporting. I am saying that you should be selective and focus on information relevant to your needs.

Say that you an engineering business that provides components to certain firms in certain sectors. It is safe to say that you have a direct interest in developments in those sectors and especially in your own customer base. This includes the likely demand for your own products or services, as well as payment patterns. It is critical that you know if your customers paying more slowly and, if so, why?

If, like most businesses, you have borrowings, then you are interested in interest rates. But, more importantly, you are also likely to interested in the availability of credit.

Each business needs to define the economic information that is directly relevant to their needs. A lot of people in business do not focus properly on the economic and industry conditions that are relevant to their businesses. They will tell you how awful the economy is when, in fact, their business is doing just fine. These perceptions about the economy can affect actions, and the results can be quite damaging.

Note to readers: This column appeared in the March/April edition of Australian Business Solutions magazine. It's not on-line, so I have pre-published it here.