Maintenance of accurate economic forecasting is just one of the difficulties posed by COVID-19, but a new paper outlines an approach that links actual transaction data with consumer sentiment to create a better picture of what is likely to happen next.
Written by Demitry Estrin, Jane Tang and Vidya Subramani – all co-founders of The Futurist Group, a New York-based consultancy – their findings are published in the Harvard Business Review.
And they state that the only way to improve the reliability of economic forecasts during the pandemic is to augment models with an ongoing evaluation of consumers’ past, current and anticipated spending patterns.
“We’ve developed an approach that renders consistently accurate forecasts, even in uncertain times, by combining forward-looking consumer sentiment with real-time transaction data,” they write.
According to the authors, consumer habits have changed because of social distancing and prolonged fear of infection – for example, it is evident that people are more digitally active than before – and, therefore, clarity about their future behaviour will come from analysing credit and debit transaction data together with forward-looking consumer sentiment.
To this end, The Futurist Group leveraged a database of 500,000 credit and debit accounts with weekly access to transaction patterns and focused on the categories most likely to be affected by changes in consumer behaviour. And to check future spending, the company also conducted large-scale and continuous online interviews.
“Our forecasting establishes a connection between past transaction patterns and consumers’ anticipated spending in the coming months,” the authors say.
For example, The Futurist Group forecast in May that there would be a 13% uptick in retail sales, while the rest of the industry expected only a 9% advance, yet US Commerce Department data later revealed a 17.7% improvement.
“Given the unique nature of this crisis and the potential lasting impact of social distancing on consumption habits, continuous measurement of anticipated spend is an important part of reliable economic forecasts,” Estrin, Tang and Subramani conclude.
“By linking actual credit and debit transaction data with consumer sentiment that approximates future spend, analysts can create a sound foundation for forecasting what happens next.”
Sourced from Harvard Business Review