Consensus Forecasts in Planning
Sykes, Michael R., Business Economics
MACROECONOMISTS generally summarize the economic outlook by producing projections for a handful of very broad aggregate indicators. On their own, these projections represent only a general template for planners looking at the outlook for a (comparatively) narrowly defined sector of the economy. But as most corporate and strategic planners know, in many industries macro forecasts are regularly used as inputs to the planning process, often to establish a starting point or a broad framework of assumptions within which the more specific problems under consideration can be examined.
For many businesses, product demand in a given market that is sensitive to the strength of economic activity may be well correlated with the behaviour of one or more broad macroeconomic indicators. For example, demand for semiconductor chips in many markets has historically been relatively well correlated with growth in overall industrial production, which is therefore often considered by sector analysts as the best indicator to use in predicting future chip demand. One major industrial company also focuses on expected industrial production growth in various (mainly European) markets, as an indicator of future demand for ball bearings and other products widely used in the industrial production processes.
Obviously, obtaining a reliable set of forecasts for a macroeconomic variable in various countries or markets is far from being the whole story: the relationship between industrial production and demand for computer chips may vary quite widely across markets, depending, for example, on the level of technology employed. Information or knowledge that is more specific to the industry, or to the past experience of the individual firm, also will be necessary. Thus, extrapolating historical relationships between demand for a product and a macroeconomic indicator is a widely used approach but is dependent upon the quality of both the interpretation of events and the macro benchmark forecasts used.
THE ECONOMIC CYCLE
In the short term, predictions of the timing of turning points in the economic cycle also can be invaluable in reaching decisions on production, inventory and manning levels, marketing strategies and pricing. In the trough of an economic cycle, weak demand is likely to mean that producers are facing strong competition for the few available orders, are running plant at well below full capacity and have cut inventory and manning levels. In spite of the rising unit labour costs that usually accompany a downturn in output, producers may be under considerable pressure either to cut prices or to offer significant discounts, and profit margins are inevitably squeezed. The question of whether to cut employment further in order to reduce costs, or possibly to close or scrap plant, will depend to a considerable extent on when and from what level the economy is expected to begin recovering. Producers will not wish to find themselves having cut capacity and employment as the economy is about to turn up, and also will wish to be well positioned from a marketing standpoint as demand begins to revive.
The economic cycle in different industrial sectors is frequently out of phase with that of the economy overall, however. In many countries, for example, construction sector activity turns down ahead of demand in the economy as a whole and often leads the revival. Producers of construction-related materials and equipment therefore also will feel the effects of a downturn and the subsequent revival relatively early. On the other hand, business investment often responds more slowly to a recovery in overall output, as producers first take up the excess capacity resulting from recession before investing in new plant. But even so, in examining either the short-term influence of economic cycles or the longer-term outlook, once a general relationship between demand for a particular product and a broad indicator of total output (such as gross domestic product |GDP~ or industrial production) has been established, macroeconomic forecasts adjusted for leads or lags can be used to "drive" a more specific model of demand for the individual sector or product. …