TRADE FORECASTS. The expressions "trade forecast," commonly used in Great Britain, and "business forecast," com monly used in the United States, are synonymous and, unless qualified, refer to the outlook for business as a whole in a given country in the immediate future for, say, a period of not more than a year or a year and a half. The terms "trade" and "busi ness" are used in their broadest sense to include all branches of economic activity. General forecasts are, of course, frequently supplemented by specific forecasts for sections of a country and for industrial groups, individual commodities, security markets or money conditions.
In most cases, a business forecast begins properly with an appraisal of conditions at the time of forecast and follows with a prediction of the direction and magnitude of the movement during the immediate future. Such a forecast may include esti mates of prospective variations expected to appear with the round of the seasons, and the "normal," or long-time, growth that is expected from one year to the next assuming no disturb ing influences. But since it is a well-known fact that business oscillates widely between periods of prosperity and periods of de pression, estimates of seasonal variation and the growth element are not usually the factors of primary importance in a business forecast.
Ordinarily, the chief object of the forecaster is to predict the time of occurrence and the direction of the next major business swing. If the fluctuations were regular in timing, forecasting would be easy.
However, a study of past business variations shows their pat tern to have been very irregular and complex, hence it is ex tremely difficult to predict the nature of the next movement. Faced by this fact, various forecasters have developed different methods of attempting to foretell the future course of business.
Types of Forecasts.—In the United States, Roger Babson was one of the earliest business forecasters to gain prominence. He based his predictions upon the theory that, in economic life as in physics, action and reaction are equal; in other words, that any deviation upward from the trend is destined soon to be offset by an equal deviation below the trend.
The analytical school of forecasters holds that the only method giving any hope of success is first to analyze existing conditions with extreme care, and then to determine by the application of economic principles what results are probable. The difficulties inherent in this method are: first, to secure information which is really adequate; second, to determine what weight is to be given to each factor; and third, to avoid being influenced by prevailing public opinion.
Forecasters of a third school base their predictions primarily upon observed sequences in the movements of variables. For ex ample, one may have noted that, when iron production increases until the percentage of all iron furnaces in operation reaches a given figure, the stock market has reached its peak. Another may have discovered that fluctuations in volumes of new orders re ceived for goods precede by a fairly definite period corresponding movements in the production of goods. Still another may have found that changes in prices of certain goods antedate changes in the total output of industry. Certain investigators have learned that variations in sunspot areas are followed by corresponding fluctuations in the volume of American factory output.
Frequently the forecasting device consists of composites or ratios of several different factors. The chief obstacle interfering with the success of forecasting on a sequence basis is that causal forces often change radically in relative importance, and that the time lag between cause and effect frequently varies widely at dif ferent periods.
Forecasters of a fourth school are commonly called chart readers. They base their predictions upon the fact that, in his torigrams (graphs representing time series), it frequently happens that patterns repeat themselves. The difficulty in applying this method is that, in many cases, the expected repetition fails to materialize.