Contrast the principal methods used to forecast the economy

Three families are compared. Econometric models use estimated equations linking variables; they are rigorous, can be re-run under different assumptions and give quantitative answers, but are complex, need stable relationships and tend to miss turning points. Leading indicator approaches track series such as new orders, building permits or yield curve slope that tend to move ahead of activity; they are simple and often signal turns, yet give false signals and can change when the economy changes. The checklist approach assesses a range of indicators judgementally; it is flexible and can absorb structural change, but is subjective, time-consuming and hard to test. In practice the methods complement each other, and a good answer matches the method to the forecasting problem.