Forecasting Growth – The Arc of Fading Dreams
It’s finally sinking in. Despite politicians’ promises and rosy forecasters’ hopes and dreams, the Fed is finally getting their forecasting on trend, following the 2008-9 economic collapse. Particularly for business owners who understand the importance of forecasting to efficient deployment of their business capital, this is welcome news.
The Arc of Fading Dreams
I think that the Wall Street Journal graphics people do brilliant work translating dry data into revealing graphic patterns, and this time I’m really impressed. Look at the arcs sweeping from left to right, as the optimism that “we’ll pull ourselves right out of this recession in the next few quarters” is gradually supplanted by the realism that, try as we might, there are many demographic and exogenous forces in the world tugging our GDP downward.
- If you look at the individual forecast arc patterns as an aggregate, you’ll see the pattern of how the forecasts converge into consensus, shepherding the grand variance sweeps of the earlier forecasts into consensus at the right tail. I would call this pattern the “Arc of Fading Dreams.” Who said statistics has to be dull? Art is where you find it.So, should we consider +/- 2% points of GDP growth a new normal for the foreseeable future? Perhaps. There are certainly many who build a case for it.
Most importantly, if you’re building and/or running a company, what do you do with this information?
Here are my recommendations:
1. Disregard everything a politician says about what growth will be under his or her administration. Just cover your ears. Many of the factors that determine GDP growth are outside of their control. China’s slowdown is only one uncontrollable. Another is population demographics. Another example is that the BrExit effects will evolve over the long term, aren’t well understood today, but in no case can an American political party control it.
2. Recognize that the Fed’s forecasts are probably more likely to be correct than in the past few years, as the forecasts now match trend. This means that they’ll be a more reliable tool as an input to your business’s strategic and tactical planning. Consider tracking this data, or at least occasionally referring to it, as a forecasting starting point.
3. Consider that while GDP growth does measure the overall economy, it’s more important to analyze whether and to what degree the industry in which your company competes will be affected by GDP trends. Look at history, but more importantly, look forward – ask your sales force, your vendors, your customers and others at your industry trade shows – how do they see the future?
4. Seek the sage counsel of investment analysts who track your industry and who fully understand the cause and effect relationships between the overall economy and your industry. If you’re working with us as your investment bankers, we’ll certainly help.
5. Dig deeper. Then deeper still. If your business’s revenue is 60% dependent upon industrial exports to China, that factor should weigh a lot more heavily in your business forecasting than a national GDP forecast. If those exports are to support an already-overbuilt Chinese housing market, that consideration would be even more germane.
6. Incorporate these insights to calibrate your own forecasts. In a few cases, such as hot new companies riding a hockey stick growth curve, there may be little correlation to the national economy, and your forecast may be little affected. Those companies would certainly be exceptions.
7. Following the Fed’s lead, prepare for tepid national economic growth on a long term basis, but watch the trends. If it comes in higher, we’ll all be happy, but don’t plan above trend for the national number. Which takes me back to point #1.
Footnote 1: Business Economics, The Journal of the National Association for Business Economics, April, 2016
McGavock Dickinson (Dick) Bransford is a Managing Director in San Francisco with Mid-Market Securities, LLC, an investment bank headquartered at 11 East 44th Street, 19th Floor, New York, New York 10017. Member FINRA/SIPC. He can be contacted at (415) 294-0002 or mdb @ mid-marketsecurities.com.
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