What Are the Different Methods of Business Cycle Forecasting?

Economists perform different methods of business cycle forecasting. These financial experts may have views on a regional economy or on global conditions. How to predict future cycles includes compiling a host of economic indicators and making a prediction on the way that gross domestic product (GDP), a measure of an economy's growth, will continue. A challenge is that the economic indicators are frequently revised, which makes the process of predicting future economic activity sometimes tenuous.

GDP, which is an indication of regional production as well as spending on products and services made locally, is a telling piece of economic data that is revealed on a quarterly basis. Businesses and governments alike are interested in knowing the rate of growth or contraction because this pace can influence future economic activity as well as corporate profits. Each quarter, when GDP is revealed, the reporting body, such as the Bureau of Economic Analysis (BEA) in the U.S., has the potential to revise results from the previous period. This impacts business cycle forecasting because economists rely on the actual data in order to make projections for future economic conditions. Subsequently, it is sometimes necessary to have one year's worth of GDP and other data from other economic indicators to reasonably forecast near-term or long-term activity.

Some of the measures used for business cycle forecasting are closer to home. For instance, the size of financial deposits made by individuals or businesses are an indication of how flush with cash consumers may or may not be. These seemingly remote activities are telling to economists who are trying to gauge future economic cycles. This method of business cycle forecasting can be applied by recording the financial activity at banks and some brokerage firms that receive deposits from customers and tracking it alongside GDP.

Investors turn to market barometers, which are indexes that trade, to obtain a sense of the direction of the overall financial markets. Economists do this, too, in business cycle forecasting. In the U.S., the S&P 500 is a wide representation of stock market activity.

According to the New York University Leonard N. Stern School of Business, the stock market performance can serve as a precursor to future economic activity. This may especially be accurate when an economy is heading into a recession. Although each stock market downturn does not always lead to depressed conditions in the economy, prolonged periods of downward pressure on stocks may be reason for economists performing business cycle forecasting to examine the relationship further.