I’ve argued that for various macroeconomic reasons, demand may not bounce all the way back after the recession ends (see “The Reset Economy“). I’ve also stated that if this is the case, then it would be valuable for companies to get some advance warning about future demand levels, and that using economic data as a forecast input could be a useful tool (see “Advance Warnings“).
Then again, since economists have not been very successful at predicting recessions, how useful would these inputs really be? To see if I could get an answer to this question, I talked to Erik Almadronos, Vice President of Consulting and Innovation at IRI, a provider of consumer and shopper market intelligence to the consumer goods, healthcare, and retail industries.
IRI uses macroeconomic data to produce category (product grouping) forecasts. They have 26 “supercategories” where they use macroeconomic inputs like unemployment rate, gas prices, and money supply as inputs to their forecasts. They currently produce short-term forecasts on whether a category is high risk (likely to decline one percent or more in dollars or units); low risk (likely to grow one percent or more); or moderate risk (in the middle of those two ranges).
So, for example, last November their category forecasts projected tobacco, carbonated drinks, and baby care as being high risk categories. In forecasting a particular category, they might have determined, for example, that the combination of gas prices and money supply data are strongly correlated with that category’s growth. For other product categories, different types of macroeconomic data might play a bigger role.
When I expressed some skepticism about how good a forecast can be made with macroeconomic data (I highlighted, for example, that just as this month’s unemployment data is being reported, the government is revising last month’s number), Almadronos pointed out that the revisions are often minor. Also, they look at five years worth of trend history, not just a single data point. Further, macroeconomic statistics are often bundled. The Index of Leading Indicators is a collection of ten indices, that when combined, tells you whether there is an “upward slope or downward slope” to the economy.
Nevertheless, Almadronos quipped that “macroeconomic forecasts exist to make astrologers look good.” But although this is a “dirty science,” companies are still better off having the best thinking available on where the economy is heading. However, big decisions, like whether to close a factory, should not be made using these kinds of forecasts alone.
What other kinds of data might be helpful? Almadronos highlighted demographic data. He has seen analyses by Copernicus Marketing Consulting that he believes are well done. While demographic data, such as total population, ethnicity, and marital status, might not tell you where the economy is going, it’s an indicator of whether a category is poised for growth or not, and where that growth is likely to be concentrated.
Category market share data is also useful, not just whether the whole category will shrink or grow, but whether your brand is gaining or losing market share. If demand bounces back, but your market share is down, your company might not realize that. You can potentially recover lost market share with the right pricing and marketing strategies. Indeed, much of the research you can buy from a company like IRI is related to how to get the most bang for your marketing buck. However, if private labels have gained market share, history suggests that gaining that market share back is very unlikely. At the very least, if you have a network of factories producing different types of products, the combination of macroeconomics, demographic, and category data will tell you which factories will more likely need to be closed, and which ones should stay operational.
Finally, Almadronos admitted that macroeconomic forecasting is particularly challenged when it comes to forecasting a turn in the economy -i.e., positive growth turning negative and vice versa. This type of forecasting is better at projecting slight increases or decreases in economic growth, not the turning points. In his words, the index of Leading Economic Indicators has “correctly predicted 9 out of the last 5 recessions.”
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