Consensus Forecasts in Business Planning: Their Benefits and Limitations

By Pang, Che-Wing | The Journal of Business Forecasting Methods & Systems, Spring 2004 | Go to article overview

Consensus Forecasts in Business Planning: Their Benefits and Limitations


Pang, Che-Wing, The Journal of Business Forecasting Methods & Systems


Consensus forecasts have a better track record than most individual forecasts, which make up the consensus ... in any given year, some panel members predict the outcome better than the consensus, but cannot do so consistently ... 'top performers' vary from year to year and are very difficult to identify in advance.

Since the fortunes and risks of almost every business plan depend on the economy's future course, timely and accurate economic forecasts for a company's decision-making are considerably in demand. Long gone are the days when managers hesitated to integrate macroeconomic forecasts into their own projections for production and investment. The supply of quality information from both academic and private sector economists has never been as broad as it is today.

However, for many users of economic forecasts, the number of competing (and often conflicting) predictions has created a dilemma of choosing one over the other. Generally, forecasters attempt to model the future of the world economy, a country, or an industry. However, numerous consulting firms, governmental, and semi-governmental institutions, are now regularly publishing estimates for a range of economic indicators. The availability of an immense volume of forecast information requires forecast users to differentiate the good information from the bad, a complex and challenging task.

Consensus forecasts, averaging the views of leading macroeconomic forecasters, have been used frequently in a number of countries for many years. The longer-running surveys of economists' expectations include: the Livingston survey, started in 1946 by a US business journalist, and monthly international macroeconomic forecast surveys, conducted by Consensus Economics since 1989. In this article, we will examine ways in which macroeconomic forecasts feed into the corporate planning process. Also, the advantages of using the consensus of macroeconomic forecasts, rather than individually developed forecasts, will be explored.

BUSINESS PLANNING

The usage of economic forecasts in company decision-making has become increasingly popular in recent years. These forecasts are for gauging the troughs and peaks of business cycles in a single country, and assessing the risks over a longer period and across a broader range of countries.

In particular, corporate planners use estimates of future macroeconomic developments (domestic and abroad) as inputs into the business planning process. This obviously requires planning managers to relate developments in their industry to specific economic variables. In doing so, they often must use historical data.

In addition, relationships exist among demand for specific products, the costs of labor/materials, and the economic outlook, so judgments must be made about them. Our discussions with business executives in recent years have found:

* The demand for autos and light trucks in the United States is strongly correlated with real, disposable, and personal income. This correlation is generally regarded as a key indicator for the demand for auto parts, which are often fabricated from aluminum, rubber or steel, as well as air conditioning units and batteries.

* The demand for semi-conductor chips is highly correlated with the growth in worldwide industrial production. This indicator is often considered to be the best for predicting future chip demand.

* A major United States copper mining and smelting company told us that expected growth in worldwide industrial production and real GDP are both important inputs in determining the demand for non-ferrous metals.

In some cases, macroeconomic forecasts are used for more than one purpose within an organization, especially for multinationals and firms selling products in many national markets. For example, an industrial gas and chemical company uses macroeconomic forecasts for its cost budgeting purposes, analysis of country risk, and pay negotiations. …

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