Using Consensus Forecasts in Business Planning

Article excerpt

It is better to use consensus forecasts than individual forecasts; individual forecasts may be more accurate at times but cannot be guaranteed ... failure in the past does not necessarily mean continued failure in predicting the future ... forecasts provide an informed view of the future which is needed for decision making.

In recent years the demand for accurate and timely business forecasts has increased markedly. Responding to demand, the availability of macro-economic forecasts has never been so widespread as it is today, with most users of such information, such as corporate planners and investment analysts, forced to choose among a significant number of competing, and often conflicting, predictions. Both academic and private sector economists regularly publish forecasts for a wide range of economic variables which are then used to provide a general overview of the likely future developments in a particular industry, country, or group of countries. In addition, macro-economic forecasts are used extensively as important inputs into various business decision-making processes and it is this aspect of forecasting (its application to the industrial planning process) that the following exposition will focus on in more detail. Specifically, this paper will seek to identify the advantages of using an average or combination of macro-economic forecasts, in short the consensus forecasts.

PLANNING IN INDUSTRY

The use of macro-economic forecasts within the financial world is widely known. Investment fund managers are often required to take a view on future macroeconomic developments in order to assess the likely changes in equity, bond and commercial property values. This can help to evaluate the prospective returns from alternative asset classes within investment portfolios, the underlying risks involved and the appropriate timing of those particular investments. Investment analysts, who are often forecasters themselves, are important users of macro-economic information, but so too are industrial executives and business forecasters.

In many cases, forecasts for the economy at large are used to derive views on movements in other industry-specific variables. For example, the demand for autos and light trucks in the United States is highly correlated with growth in both total US industrial production and real disposable income. Therefore, forecasts for those two variables, perhaps combined with other significant economic indicators (and allowing for any lagged effects), can be used to provide an indication of likely trends in demand. As a further example, one United States copper mining and smelting company has told us that consumption of that particular commodity is highly correlated with growth in both total GDP and industrial production. In addition, the individual analyst, or team of analysts, may also be required to form abroad economic overview as a basis for considering the location of a manufacturing facility, or for appraising the likely returns from investing in a new overseas factory.

It is sometimes the case that forecasts are used for more than one purpose within an organization. For example, one company producing industrial gases and chemicals utilizes macro-economic forecasts for its firm's cost budgeting, as well as for the analysis of country risk -- an important feature of planning within international corporations and for those firms selling their products in world-wide markets.

Another international manufacturer of chemicals and petroleum products is required to form its own country-by-country inflation expectations and therefore makes use of economists' latest consumer price inflation forecasts as a benchmark for their own pay negotiations. The decision makers therefore gain a useful insight into future trends and turning points in the economy at large as part of the more specific planning process.

AN UNCERTAIN WORLD

While the macro-economic environment is inherently cyclical, the extent of the peaks and troughs of a particular cycle, as well as its duration, are often difficult to judge in a world of great uncertainty. …