E.  Demand Estimation

1.  Qualitative forecasts

• Use when quantitative data is not available

a.  Survey techniques

• Economic decisions made well in advance of expenditures

• Best known surveys:

(1) Business executives' plant and equipment expenditure plans

• Department of Commerce, Securities and Exchange Commission, National Industrial Conference Board

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(2) Plans for inventory changes and sales expectations

• National Federation of Independent Business (NFIB), Department of Commerce, McGraw-Hill, Dun & Bradstreet, Institute for Supply Management

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(3) Consumer expenditure plans

• Bureau of the Census, University of Michigan

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b.  Opinion polls

(1) Executive polling

• Poll top management

• Most knowledgeable about firm and products

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(2) Sales force polling

• Poll sales force in the field

• Closest to the market

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(3) Consumer intentions polling

• Poll potential buyers

• Most often done about intentions to purchase durable goods

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2.  Time-series analysis

• Time-series data - unit of analysis is constant, variable varies by time period

• Time-series analysis - forecast future values based on past observations

a.  Reasons for fluctuations in time-series data

(1) Secular trend

(2) Cyclical fluctuations

(3) Seasonal variation

(4) Irregular or random influences

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b.  Trend projection

(1) Linear trend

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(2) Constant percentage growth rate model

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c.  Seasonal variations

• Seasonality may affect forecast if time period is less than one year

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3.  Smoothing techniques

• Useful when there is a lot of variation

a.  Moving averages

• Take an n-period average

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• Gives equal weight to all observations

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b.  Exponential smoothing

• Puts more weight on recent data

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4.  Barometric methods

• Deals with cyclical swings

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• Composite index - weighted average of individual indicators

• Diffusion index - calculates proportion of indicators that are up

• Compiled by the Conference Board

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a.  Leading indicators

• Move in advance of the economy

- Average weekly hours, manufacturing
- Average weekly initial claims for unemployment insurance
- Manufacturer's new orders, consumer goods and materials
- Institute for Supply Management new orders index
- Manufacturer's new orders, nondefense capital goods excluding aircraft
- Building permits, new private housing units
- Stock prices, 500 common stocks
- Leading Credit Index
- Interest rate spread, 10-year Treasury bond less federal funds
- Average consumer expectations for business and economic conditions

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b.  Concurrent indicators

• Move along with the economy

- Employees on nonagricultural payrolls
- Personal income less transfers
- Industrial production
- Manufacturing and trade sales

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c.  Lagging indicators

• Move after the economy moves

- Average duration of unemployment
- Inventories to sales ratio, manufacturing and trade
- Labor cost per unit of output, manufacturing
- Average prime rate
- Commercial and industrial loans
- Consumer installment credit to personal income ratio
- Consumer price index for services

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5.  Econometric models

• Attempts to explain variable being forecast

a.  Single-equation models

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b.  Multiple-equation models

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