![]() ![]() “Forecasts made during the 1980 recession underestimated the strength of the early recovery.” “Forecasts made from mid-1977 through early 1978 did not capture the acceleration of the inflation rate in 19.” “Forecasts made from 1973 through early 1974 initially did not foresee the recession and later misinterpreted the severe recession as an ‘energy spasm.’” But on four occasions, the magnitude of error was large. For more than half of this period, they were quite successful. Stephen McNees of the Federal Reserve Bank of Boston has been analyzing the track record of the best-known economic forecasters since 1970. In few fields has the concentration of the best techniques and the best brains been as high as that in short-term macroeconomic forecasting for the United States. But sooner or later forecasts will fail when they are needed most: in anticipating major shifts in the business environment that make whole strategies obsolete (see the insert, “Wrong When It Hurts Most”). They often work because the world does not always change. They are usually constructed on the assumption that tomorrow’s world will be much like today’s. And that is what makes them so dangerous. Since the early 1970s, however, forecasting errors have become more frequent and occasionally of dramatic and unprecedented magnitude.įorecasts are not always wrong more often than not, they can be reasonably accurate. ![]() Traditional planning was based on forecasts, which worked reasonably well in the relatively stable 1950s and 1960s. In this article and a sequel to come, the author describes their evolution and ultimate impact on Shell’s management.įew companies today would say they are happy with the way they plan for an increasingly fluid and turbulent business environment. But the decision scenarios developed by Shell in Europe are a far cry from their usual U.S. Undoubtedly, many readers believe they are familiar with scenarios. ![]() And again in 1981, when other oil companies stockpiled reserves in the aftermath of the outbreak of the Iran-Iraq war, Shell sold off its excess before the glut became a reality and prices collapsed. Beginning in the late 1960s and early 1970s, Shell developed a technique known as “scenario planning.” By listening to planners’ analysis of the global business environment, Shell’s management was prepared for the eventuality-if not the timing-of the 1973 oil crisis. Still, there are exceptions, like Royal Dutch/Shell. companies continue to use a variety of forecasting techniques because no one has apparently developed a better way to deal with the future’s economic uncertainty. The reason is obvious: forecasters seem to be more often wrong than right. It is fashionable to downplay and even denigrate the usefulness of economic forecasting. ![]()
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