StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

The Real Use of Economic Forecasts

03 Aug 2010
Posted by Bruce Bartlett

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.

Not just collusion on pricing and production

In HR we received industry wage and benefit reports. These were compiled from surveys of similar sized companies in our industry, and they helped us to keep our compensation packages in the middle of the pack.

Knowledge is not collusion.

Knowledge is not collusion. And even tacit collusion would only occur if the consequence of that information is some sort of economic rent extracted from suppliers/customers/etc via higher margins or higher ROI or something. Maybe that exists somewhere -- but the paper industry is definitely not an example. And I seriously doubt any company sets its prices/production based on an economic forecast rather than on serious internal stuff like inventory/etc.

The biggest collusion in our economy today is between the government, the Federal Reserve, and the main Wall St/money center banks. They actively collude to set the price/supply of capital - across all time durations -- and in so doing create all the malinvestment and volatile asset prices and economic cycles that result everywhere else in the economy.

Including in a capital-intense paper industry that then has to waste time/money trying to predict those cycles knowing that it can't rely purely on info/forecasts produced by those who are creating those macro cycles to begin with.

I'd detail the whole host of economic rents that are extracted from everyone else in doing this --- but I doubt you give a damn. No one in DC ever does. Which isn't surprising since the whole town feeds off that rent.

Interview on China TV regarding US economy

I am a Freelance News Producer working with USTV. USTV is a television management company that provides services to production and broadcast companies worldwide, such as CCTV.

CCTV-9, China's English speaking channel, has requested a financial news story regarding the future state of the US economy and the actions taken by the Fed. CCTV-9 is distributed to 1.2 billion people and has a viewership of 80 million people. This story would likely air several times and become available on-line once it has aired.

We would like to interview you to get your insight on state of the US economy, the possibility of a double dip recession, the actions the Fed have taken so far and what actions they may take in the future and the overall effect of the US economy on other economies worldwide.

I would like to arrange a ten to twenty minute interview for next week depending on your location and availability.

Thank you for your time and I hope we can arrange this interview.

I am attaching a sheet better explaining the relationship between USTV and CCTV.


Pat Nagy

Law journals

There is quite a bit of work on this in legal circles. The phrase you want to search for is "conscious parallelism."

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