Forecasting Principles

A demand side approach to forecasting is fundamentally different from the econometric modeling that dominates the forecasting world. We begin with the presumption, which we think has been theoretically and empirically validated over the past century, that the economy responds to aggregate demand. We then assess the likely influences on demand going forward and apply estimates of the multipliers to each influence.

Our explanation uses mathematics, but is not an equation or formula, because the assumptions that underly the models are the core of the understanding, not the mechanical devices used to manipulate the assumptions.

For example, the situation facing the U.S. in 2009 is dominated by (1) a collapse of consumer demand following the overleveraging of households and the subsequent collapse of their principle assets' values, (2) a continued decline in private productive investment, (3) a modest stimulus from government divided into support for household incomes and investment in public infrastructure, (4) a decay of state and local government spending following radical declines in their revenues, (5) the political burden of high federal deficits in the absence of the political will to raise revenues, (6) the institutional obstructionism of the Fed and its mistaken understanding of economics, and (7) the collapse of the financial sector which has crippled and socialized the banking function while enabling the institutions to continue nonproductive and destabilizing speculation activities.

We estimate the effects of each of these on employment and investment going forward and the consequent effects on GDP. Completely contrary to the primitive orthodoxy, we give great weight to government's policy choices, both for good and ill, in affecting the dominant conditions.

The resulting forecast is both more accurate and less precise than forecasts based on trend analysis and mathematical modeling, which essentially forecast the past and hope the relationships continue into the future.