Problem of Changing Expectations

The subtle problem of changing expectations bedevils both macroeconomic and microeco-nomic forecasting. If business purchasing agents are optimistic about future trends in the economy and boost inventories in anticipation of surging customer demand, the resulting inventory buildup can itself contribute to economic growth. Conversely, if purchasing agents fear an economic downturn and cut back on orders and inventory growth, they themselves can be a main contributor to any resulting economic downturn. The expectations of purchasing agents and other managers can become a self-fulfilling prophecy because the macroeconomic environment represents the sum of the investment and spending decisions of business, government, and the public. In fact, the link between expectations and realizations has the potential to create an optimistic bias in government-reported statistics.

Government economists are sometimes criticized for being overly optimistic about the rate of growth in the overall economy, the future path of interest rates, or the magnitude of the federal deficit. As consumers of economic statistics, managers must realize that it can pay for government or politically motivated economists to be optimistic. If business leaders can be led to make appropriate decisions for a growing economy, their decisions can in fact help lead to a growing economy. Unlike many business economists from the private sector, government-employed and/or politically motivated economists often actively seek to manage the economic expectations of business leaders and the general public.

It is vital for managers to appreciate the link between economic expectations and realizations, and to be wary of the potential for forecast bias.

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