The Insider's Guide to Economic Forecasting
Or, How to Get Ahead of the Competition by Becoming Your Own Economist.
A well-known economist pulls back the curtain on the indicators he and other top insiders use to figure out where the economy is headed. These indicators can guide you, too.
Published August 2003
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COMMENT ON THIS ARTICLEIn recent months, most conversations about the direction of the economy locked on to a single crucial indicator: our national security.
Would swift victory in Iraq be a cure-all for our economic ills? Or would continued global anxiety produce a poor climate for business? Now that the elephant has left the room, what should have been clear all along is even more apparent: The U.S. economy -- for better or worse -- is shaped by a diverse mix of factors. To understand what is happening necessitates deeper inquiry.
Recently, the projections of many top forecasters have taken an optimistic turn. The stock market also has been more robust. But the picture is hardly clear. Stocks are a notoriously unreliable indicator -- as the "sucker's rallies" in both 1974 and 2002 showed.
As every entrepreneur learns at some point, correctly reading trends in the economy can make or break a business. Just ask a retailer who guesses wrong about how much merchandise to order for the coming season, a factory owner who fails to expand in time to meet a surge in demand, or a developer who decides to put up office space just before a recession. Of course, company owners already have a good sense of how the economy is doing just by looking at their own business. To help Inc. readers round out their knowledge and forecasting abilities, I have assembled a guide of lesser-known but important economic signposts used by some of the nation's savviest insiders, including some I used myself while serving as President Clinton's top economic adviser. These are not the usual stats you read about in the newspaper.
For instance, if, like many others, you think unemployment statistics aren't telling the whole story in the labor market, you might instead want to keep an eye on the fate of the temp industry. Or if you believe consumer-spending stats tend to be inflated, you could follow year-to-year sales receipts at Wal-Mart stores.
You don't have to have a doctorate in economics to find this information. In fact, not only does this guide tell you precisely where to get it, you can even go to a new tool at Inc.com that offers a direct link to most all of the hard-to-find sources mentioned below.
CEO Polls
Ever since a falloff in business spending preceded the recession in 2001, forecasters have been trying to project when businesses will start investing more money in plant and equipment. Many economists closely track industrial capacity figures in an attempt to guess when companies will need to build more factories, but Federal Reserve Chairman Alan Greenspan just picks up the phone. Though Greenspan is renowned for finding significance in economic minutiae, it's also no secret that he often speaks with the chief executive officers of major companies to get a sense of how badly they are lusting after the latest in machine tools.
The periodic surveys of two of the most prominent organizations of business CEOs -- the Business Roundtable and the Business Council -- do a good job of summarizing CEO mood swings for those of us who can't get Warren Buffett or Edsel Ford on the phone. Both groups ask CEOs their expectations, not only for the general economy, but also for their specific businesses.
Recently, both surveys have shown themselves prescient. For instance, last September many economists were going public with predictions that an economic uptick might be imminent. A report from the Business Council suggested otherwise. Of the CEOs it had surveyed, 78% had said that they planned to either reduce their company's capital spending or keep it the same. It's easy to see how the CEO survey did a much better job of forecasting than the optimistic economists.
The most recent CEO polls continue to foretell sluggishness. In April, the Business Roundtable reported that 82% of CEOs in its poll did not anticipate increases in capital spending. What's more, fewer than 10% of the CEOs in the Business Roundtable poll expected to hire new employees, while nearly 45% expected work force reductions.
Another CEO survey, conducted this April by Goldman Sachs, found a strong preference among CEOs for investments in existing assets in coming months and recorded an overall gloomy outlook on business prospects. For the time being at least, the aggressive CEO of the late 1990s has been replaced by a more cautious leader who may need to see more significant signs of a recovery before committing company resources in a major way.
The next Business Roundtable survey is scheduled to be released in July; expect improved spending and hiring projections for the second half of 2003. The next Business Council survey is due out the second week of October.
Data: The Business Roundtable's periodic surveys can be found at www.brtable.org. The Business Council releases its finding only by request (www.businesscouncil.com for contact info).
