Forecasting
163
more accurate. The U.S. Bureau of Economic Analysis has developed (and publishes) the Index of Leading Indicators. This index signals future changes in the course of the economy. The revised index is a weighted average of 11 economic series: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
Weekly hours of manufacturing workers Manufacturers’ new orders Changes in manufacturers’ unfilled orders Plant and equipment orders The number of housing building permits Changes in sensitive materials prices Percentage of companies receiving slower deliveries The money supply The index of consumer confidence The index of 500 companies’ common-stock prices Average weekly claims for unemployment insurance
Positive changes in the first 10 indicators (and a decline in the last) indicate future economic growth, whereas persistent declines in the index presage a weak economy and possible recession. On average, the composite index tends to turn down nine months before the onset of recession. The index increases about four to five months before the economy bottoms out and begins to grow.
Forecasting Performance When macroeconomic and microeconomic risks loom large, a firm’s decisions are only as good as its economic forecasts. In 1987, Walt Disney Co. embarked on an ambitious project to open a $2 billion theme park outside of Paris. Besides the park, Disney’s investment encompassed over 5,000 hotel rooms, office space, hundreds of private homes, and a golf course. However, since opening in April 1992, Euro Disney has floundered with lower-than-expected revenues and elevated costs. In the low season (November through March) Disney’s luxury hotels averaged only 10 percent occupancy rates. Indeed, there were no buyers for the additional hotels that the company planned to build and sell. The average European visitor spent far less on food, lodging, and merchandise than the average visitor to the company’s American parks. In making its decision to build the park, Disney faced a monumental task of economic forecasting: The company’s planning relied on both microeconomic
Forecasting the Fate of Euro Disney
