Economic forecasting has long been an area of interest because of its connection with high finance, fortunes won and lost and the criticality of economic trends for the social and political welfare of the country. Numerous public and private organizations are devoted to the production of regular economic forecasts, and heavily funded research projects seek more accurate and reliable models on which to base these forecasts. While much attention is focused on the area of economic forecasting, and numerous computerized models have been developed to predict economic performance, the reliability and accuracy of these models has come into question, in large part because of the importance of the economic forecast to everyday activities. This research examines the business cycle, the current basis of economic forecasting, and short and long-term methodologies of forecasting.
Until the 1970s, it was widely accepted that the American economy passed through business cycles. Such cycles were characterized by expansion and contraction phases, and conventional wisdom held that such cycles differed in the length of the cycle, but not in the existence of the cycle overall. From 1854 to the mid-1960s, analysts generally considered that business cycles varied in length from between one and eight years, with the most common length being three years and the average length being four (Dauten & Valentine, 1968, p. 279).
Business cycles, according to traditional thinking, affected all countries that were based on free-market principles. Highly organized countries were likely to have highly organized business cycles, with cycles occurring at like times in Western Europe and the United States. Minor cycles did not share this commonality, and the United States was considered to have had more business cycles than Europe overall, and it was not uncommon for some countries to enter recovery while others remained in recessionary states.
This lack of...