Why Accurate Forecasting Matters

Seeing the future before others see it provides a competitive advantage that leads to enhanced profitability and compound annual growth. If you see the changes ahead of time and plan accordingly (which includes financial budgets and capacity planning and pricing strategies), you will make more money and serve your markets better than your competitors will be able to.

ITR Economics’ track record for seeing recessions and rising trends (both are equally important) is proven year after year to our consulting clients, subscribers, and thousands of executives attending our presentations across the US and Europe. Our experience stands in stark contrast to the mostly accurate perception of the economic forecast industry, noted below.

The Rest of the Industry:

There was an article in the July 28 New York Times noting that “economists are notoriously terrible at forecasting recessions, especially more than a few months in advance.” The article then goes on to list indicators to monitor. The list from the article is below, and my comments explain why so many people, economists and others, can’t foresee when a recession will occur. They are either using the wrong indicators or don't know how to apply the indicator data.

Unemployment Rate - This is an essentially coincident leading indicator and therefore is not insightful. It may be particularly useless during this business cycle and the next, given the tight labor situation that will continue for years in the US.

Yield Curve - The yield curve (using the US 10-year and 3-month bonds) inverted in June. As we mentioned at the time of its occurrence, this provided a confirming signal regarding the current business cycle slowdown/downturn that earlier indicators had forewarned about. The main trouble with using the yield curve as a primary leading indicator is that the lead time to recession is quite variable, decreasing its utility for our work.

ISM Manufacturing Index - Our readers know that we utilize the 1/12 rate-of-change of this series as one of our primary independent variables. Using the 1/12 provides greater reliability and lead time, as spelled out in our first book, "Make Your Move."

Consumer Sentiment - Very popular but not useful to us. Consumers are influenced by many factors that can shift their sentiment without altering their spending patterns. It is the spending that really matters.

Dealer's Choice - The article goes on to list several options for a fifth leading indicator. The only worthwhile one in the list was residential building permits. We run the 1/12, 3/12, and 12/12 rates-of-change on the data to develop objective Business Cycle Checking Points™ to use this series. 

Below is a partial list of our preferred leading indicators. Note the lead times shown on the table. That enables ITR Economics to objectively peer deeper into the future than most other economists and non-economists.

US Economic Leading Indicators

The Right Inputs Matter:

Knowing what inputs to use, how to use them, and having our complex business cycle theory as the framework for applying the leading indicator input are crucial to achieving the results we post at ITR Economics. It also helps that we really don’t need to pay homage to any corporate master; we make our money by being right about the good times as well as the difficult times. Recession or recovery, we don’t get paid any more or any less. Political considerations are not part of our approach to economic forecasting, and this also has served us exceedingly well through the seven decades ITR Economics has been forecasting the future.