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Output Expectations and Forecasting of UK Manufacturing

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  • David Bywaters

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  • Gareth Thomas

Abstract

This paper analyses both quarterly data from the Confederation of British Industry (CBI) Survey on respondents’ expectations of recent and forthcoming manufacturing output and monthly Office of National Statistics (ONS) figures on actual manufacturing output within the UK. Quarterly output expectations of the CBI manufacturers are explained from the monthly ONS observations using a bounded rationality approach. The logistic formulation models the diffusion process across respondents. There is a backward-looking CBI Survey perspective, explained by past ONS observations, and a forward-looking perspective, explained from future ONS statistics. Also, the forecasting of monthly manufacturing output from earlier values, along with the quarterly CBI Survey information, is examined and tested against the alternative Pesaran/Thomas method. The study provides econometric evidence for the validity of the logistic model and shows that bounded rationality can explain the formation of predictions among business managers in the UK manufacturing sector. The emerging consensus from the literature, supported by this paper, is that the logistic format is a superior approximation to the true data generating process compared with the earlier standard Anderson/Pesaran/Thomas approach. An adjustment to the Survey is used, which achieves perfect symmetry with up and down versions of the data. The benefits of this adjustment are tested in the forecasting section. Copyright International Atlantic Economic Society 2008

Suggested Citation

  • David Bywaters & Gareth Thomas, 2008. "Output Expectations and Forecasting of UK Manufacturing," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 36(2), pages 125-137, June.
  • Handle: RePEc:kap:atlecj:v:36:y:2008:i:2:p:125-137
    DOI: 10.1007/s11293-008-9110-5
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    References listed on IDEAS

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    1. James Mitchell & Richard J. Smith & Martin R. Weale, 2002. "Quantification of Qualitative Firm-Level Survey Data," Economic Journal, Royal Economic Society, vol. 112(478), pages 117-135, March.
    2. Ciaran Driver & Giovanni Urga, 2004. "Transforming Qualitative Survey Data: Performance Comparisons for the UK," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(1), pages 71-89, February.
    3. Hansen, Bruce E., 2005. "Challenges For Econometric Model Selection," Econometric Theory, Cambridge University Press, vol. 21(01), pages 60-68, February.
    4. William A. Branch, 2004. "The Theory of Rationally Heterogeneous Expectations: Evidence from Survey Data on Inflation Expectations," Economic Journal, Royal Economic Society, vol. 114(497), pages 592-621, July.
    5. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 38(2), pages 112-134.
    6. James Mitchell & Richard J. Smith & Martin R. Weale, 2005. "Forecasting Manufacturing Output Growth Using Firm-Level Survey Data," Manchester School, University of Manchester, vol. 73(4), pages 479-499, July.
    7. Simon, Herbert A, 1986. "Rationality in Psychology and Economics," The Journal of Business, University of Chicago Press, vol. 59(4), pages 209-224, October.
    8. Carlson, John A & Parkin, J Michael, 1975. "Inflation Expectations," Economica, London School of Economics and Political Science, vol. 42(166), pages 123-138, May.
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    More about this item

    Keywords

    Manufacturing; Output; Expectations; Forecasting; Logistic; Bounded Rationality; C10; D21;

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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