1FORECASTING THE ECONOMY

The economy can be forecasted by observing the growth or decline of GDP or by studying past trends and economic boom and bust scenarios. Usually one forecasts refinements of an already perceived direction. For example, you may forecast GDP growth of 3.2 percent versus an expert consensus estimate of 3.0 percent. This means the level of the stock market is estimated a bit too high or too low, depending on the actual growth of the economy. If the S&P 500 Index is at 1200 and the estimate is off by only 10 points, the level of error is small—a scenario much more pleasant than being way off by something like 300 points. If you are off by a few hundred points on the downside, you will have forecasted a boom when, in fact, ...

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