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Adventures in Forecasting: Scenarios and Volatility

Last week Forisk hosted a Timber Market Analysis class attended (remotely) by over 70 students. We enjoyed engaging with such a lively group of market analysts over the course of two days. The main topics on our second day related to forecasting. Forecasts are difficult and we emphasized that any effort to forecast should come with a healthy dose of humility and skepticism. We may have an outlook on housing markets over the next ten years, but as we saw over the last three years, the real world is volatile. Through a well-defined range of scenarios, we hope to describe the extent of volatility and understand the implications of those possible outcomes.

As we prepare our fourth-quarter Forisk Research Quarterly, we start with our forecasts of macroeconomic drivers and rely on those same forecasting principles. Our Base Case forecast is founded on the likeliest economic outlook based on a range of third-party forecasts. For example, we average eight publicly available Gross Domestic Product (GDP) forecasts over the next two years to provide our short-term outlook. The Congressional Budget Office (CBO) long-term forecast informs our longer-term outlook. As with so many aspects of the economy, though, GDP can be volatile. Over the last 20 years, GDP averaged around 2% growth annually, but the variation (one standard deviation) year-to-year was also close to 2%. Looking over longer periods helps smooth some of the annual volatility. The average 10-year compound annual growth rate (CAGR) from 2002 to 2022 averaged 2.27%, while the variation of one standard deviation was 0.7%. Most of the variability was a function of the shift in economic growth following the Great Recession (Figure). The U.S. economy slowed from consistently averaging over 3% CAGR to struggling to maintain 2% CAGR over the last decade.

Figure: Ten-Year GDP Compound Annual Growth Rate (CAGR) with Forecasts, 1990-2032. Sources: Congressional Budget Office, Forisk


How does this inform our outlook on economic growth? The combination of our short- and long-term GDP outlook averages 1.9% CAGR over the next ten years. What are reasonable scenarios to guardrail our expectations for the economy? Historically, the 10-year CAGR varies by 0.7%, and we use this level of variability to drive our Slow and High forecasts for GDP over the next decade. Our High Case would put us on a path back towards 1990’s and early 2000’s growth rates, while our Slow Case sees the economy growing less than 1.5% per year over the next decade. The implications of these three national outlooks inform our regional and local forecasts of the forest industry.

For more information about the Forisk Research Quarterly (FRQ), click here or contact Heather Clark at hsclark@forisk.com. 

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