It's time to develop your business plan for 2014, which means economic assumptions. Some people disdain economic forecasts, but everyone has a view of the future. It may not be numerically explicit, but everyone believes that next year will be better, about the same, or worse. There are varying levels of confidence about these beliefs, but everyone has a view of the future. A good business planning process makes these views explicit. In case you don't have a favorite economist to help you with your planning, here are some simple guidelines for incorporating economic forecasts into your 2014 business plan.
Don't bet your company on one economic forecaster. Find middle-of-the-road forecasts and use them for your planning. Unless you run an economics consulting firm, your expertise is in your company, not forecasting GDP. Get a plain vanilla forecast and put your efforts into what you know best: your business.
There's that guy who has a blog and forecasted the recession. Beware. A useful forecaster did not just forecast the last recession; he forecasted boom before that. Too many pundits are pessimistic all the time, then claim prescience anytime the economy falters. Careful analyses of forecast accuracy have found that no one forecaster has consistently outperformed the consensus forecast. (We say "consensus" whether there's a lot of agreement or not. It's just a buzz word for the average of a large number of forecasts.)
Economic Growth remains moderate. As of this writing (September 2013), the overall economy is expected to grow by 2.6 percent inflation adjusted, according to the Survey of Professional Forecasters (a free resource from the Federal Reserve Bank of Philadelphia). Without inflation adjustment, which is more comparable to companies' top line sales growth rates, the forecast is 4.3 percent growth. Other sources of economic forecast compilations are the Wall Street Journal, updated monthly but available only to on-line subscribers, currently forecasting 2.8 percent inflation-adjusted growth. Blue Chip Economic Indicators provides more detail but is pricey.
For foreign economic growth, I use the International Monetary Fund's World Economic Outlook. It's forecasts tend to be close to the middle of private sector forecasters. Currently, the IMF expects global economic growth of 3.8 percent next year, inflation-adjusted. Forecasts are available for all countries, which is a boon for the company with varied foreign operations.
Regional economic forecasts are harder to find. The Western states are covered by Western Blue Chip Economic Forecasts, a free resource provided by the W. P. Carey School of Business at Arizona State University. For other states, your best bet might be looking up the state government's revenue forecast department.
Inflation forecasts are mild. The Survey of Professional Forecasters puts the Consumer Price Index increase at 2.1 percent, the same as the Wall Street Journal panel (which is not surprising, because there is substantial overlap among the contributors to the two surveys). Wage and benefits inflation are not addressed specifically, but with low CPI inflation and the surveys showing the unemployment rate at 7.1 percent next year, it's unlikely that the economy will push labor inflation up. Over the past 12 months, wage and benefits costs combined grew by 1.9 percent. However, Obamacare is a monkey wrench in benefits cost forecasts. Different companies are in different circumstances, so consult your human resources manager for insight into your likely health care costs.
Businesses that trade in oil and other raw materials find the CPI too general. The Wall Street Journal's forecasters expect oil prices to end 2014 at $98.73. I personally expect oil prices to fall, but business plans are probably better made with the consensus rather than my prediction. Commodities prices have been gently falling for the past year, a trend that I expect. The International Monetary Fund predicts a 4.3 percent decline for global non-fuel commodities, quoted in U.S. dollars. However, I would recommend a large band of uncertainty around this forecast.
Interest Rates will rise. The increase in short-term interest rates won't begin until 2015, but long-term rates will rise slowly, according to the consensus reported in both the Journal's survey and the Survey of Professional Forecasters.
Two additional pieces of advice. Avoid the 3 strategic planning pitfalls, and incorporate economic contingency plans into your process. The Wall Street Journal's economic forecast panel estimates a 15 percent risk of recession in the coming 12 months. That deserves some thought.