The Real Use of Economic Forecasts
Tyler Cowen wonders why businesses pay for private economic forecasts since they are unlikely to be better than what is freely available. If they are only interested in a forecast of real GDP or unemployment or something of that sort, he is quite right. Paying for such information is a waste of money.
Why Tyler may not realize is that forecasting companies do far more than generate aggregate data; they also produce a vast amount of industry specific data that is enormously useful for investors, managers and others that need to know how a particular industry is expected to perform given the forecast for GDP, inflation etc.
In some cases, the industry data may even contribute to price collusion. I learned this from someone in the paper industry who told me that her company subscribed to what was then called the Data Resources Inc. model--at great cost I would add.
What did her company use the DRI model for, I asked. She explained that DRI requested confidential internal data from its clients regarding price and sales forecasts and such so as to make DRI's industry forecasts more reliable. DRI also indicated that all of her company's competitors were also DRI clients.
Knowing this and knowing that her company had only a couple of large competitors, she was able to take the DRI forecast for the paper industry and adjust the data for the internal figures she had given to DRI to, in effect, get a fairly accurate forecast of what her company's competitors planned in terms of prices and output etc. Obviously, this made the forecast very valuable.
Assuming that every company in the paper industry did the same thing, DRI enabled its clients to collude legally. I'd be curious to know if any academic research has ever been done on this topic.