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A business leader looking at plans for 2025 and 2026 sees politics in every news report. Most of us have a deep, visceral reaction to President Trump’s inauguration speech and executive orders. The reaction may be wildly positive or morosely negative, but pretty much everyone has a strong reaction. Unfortunately, emotional responses interfere with sound analysis of a business and economic forecast.

Numerous academic studies have shown that sports fans have biased expectations for their favorite teams. They overestimate their teams’ chances of winning, place bets in line with their biases, then lose money.

Politics is likely to be the same. Those who applaud Trump’s DEI reversal will likely feel good about the overall economy. Those who believe his January 6 pardons to be a threat to the rule of law may show pessimism about economic growth. Our political biases don’t really help us with the substantive analysis of economic prospects. But three straightforward steps can help anyone improve a business projection that relies on an economic forecast.
 

Recognize Your Bias Before You Forecast

Recognize your own feelings about the president and the new policies. One does not have to abandon opinions or deny them, but simply acknowledge them. Be cautious about conclusions the emphasize those opinions. Play devil’s advocate with yourself, or use a colleague with differing political opinions. (But only if that conversation can be polite.)
 

Start With A Base Rate Economic Forecast

The author of Superforecasting, Philip Tetlock, advocates for beginning with a base rate for any prediction, whether economic or business or social. For example, as an economist I think about the long-term average growth rate of the economy. A financial forecaster knows the historical average interest rate and return on capital. A cost analyst knows the long-run average inflation rate for key commodities. And even when the analysts don’t look at official statistics, people use their experience to develop a sense of what’s most common. Statistics are best, but good experience is a close substitute.

These base rates are not the end of the forecasting process—things usually don’t end up at the average. Over the last 20 years, the overall U.S. economy, measured by inflation-adjusted GDP, has averaged 2.1%. One could argue for a longer period to use for the base rate (we have rough estimates back to 1790, which give a long-run average of 3.7%) or a shorter period, but two percent GDP growth is a good starting point. Note that long-term growth rates that I call “average” are actually compound annual growth rates, also called geometric means.
 

Find Mechanisms To Change The Forecast

The third step in removing political bias from a forecast is to scan for specific mechanisms that warrant a change from the base rate. Rather than simply saying a president will be good or bad on general grounds, look for actual policies that would likely impact the economy. Economists use two approaches to determine which policies to study, derived from our theories of long-term and short-term economic activity.

For long-run analysis, output is determined by the size of the labor force and the productivity of workers. We can elaborate on each of the concepts, but start with the simple numbers. A person could gauge Trump’s economic impacts by looking for factors that will impact the size of labor force, bringing us to immigration policy. We could also look at issues affecting productivity, such as deregulation.

Short-run economic analysis relies heavily on aggregate demand: how much will spending be for domestically-produced goods and services by consumers, businesses for capital goods, and by government, plus our exports to other countries. Tariffs come to mind as an issue here, given that GDP measures spending on domestic production. We must keep in mind that increased aggregate demand would be inflationary if we don’t have room to grow output in the short run.

Economists work to determine reasonable magnitudes for these effects. Many people I speak with have good gut-level analysis of the direction of effects, but it takes work with statistics to learn whether the effect will be small or large. For the immigration analysis, compare the recent flow of new residents with our historical average increase in the labor force. For tariffs, look at the volume of trade with affected countries or of specific commodities. A policy may be hugely stupid but fairly small, or very wise and also of negligible impact. Most of the political comments I read seem to overrate the impact of policies, whether the comments are pro-Trump or anti-Trump.

Your favorite team may have won or lost the election. But be careful how you bet on the economic forecast: You may be biased.

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