Economic forecasting, like forecasting the weather, is not an exact science; even professional economists disagree on the direction of the economy at any given point in time. Here, we will discuss two key factors that can help you figure out where the economy currently stands and where it's heading in the near future.
Economic forecasters are always searching for signs of a future downturn. Because consumer spending has historically accounted for about two-thirds of the economy, many observers look to issues affecting consumers for clues about where the economy may be heading. Paying attention to levels of consumer debt is particularly important.
The Federal Reserve Bank
Consumers affect the economy by acting according to their own perceptions and pocketbook pressures, but federal policy decisions also move the economy. Monetary policy is administered by the Federal Reserve Bank (the Fed), which evaluates the individual, market, and governmental forces acting on the economy and takes action to keep it on an even keel.
The Fed's most effective short-range policy decision is setting short-term interest rates to control inflation. When the Fed sees that the prevailing forces will increase inflation, it attempts to slow the economy by raising short-term interest rates; on the other hand, if the Fed sees that the economy has slowed too much, it encourages growth by lowering short-term interest rates and making it easier to borrow.
Personal Economic Forecasting
Examining your own consumer spending and debt, as well as that of your friends, relatives, and business associates, may give you some insight into the short-term future of the economy. Combining this knowledge with observations of Fed activity and advice from a qualified financial professional will give you a good basis for making sound financial and investment decisions.