9781118041581

Forecasting the economy is big business. Scores of forecasters, many using econo-

metric models that contain hundreds of equations, are paid handsomely by private

businesses for predictions of the future course of the economy. Like the yacht dealer

in the previous chapter, businesses strive for early warnings of changes in the course

of the economy. The fluctuation in stock market prices is one such early signal. Steady

and sustained increases in stock prices (as summarized by the Dow Jones Industrial

Average or the S&P 500 index) point to a growing economy over the next six to nine

months. Stock market drops signal a coming recession. In fact, stock market move-

ments have been a key leading indicator of recessions. Each of the eight postwar U.S.

recessions has been preceded by a sustained fall in stock prices. (These price drops

have come between 6 and 12 months in advance of the onset of the recession.) How

should a decision maker (the yacht dealer, for instance) judge the chances of a reces-

sion after observing a rising stock market or after a falling market?

Future historians will remember the last half of the twentieth century as the

dawning of the Age of Information. Information is the business of a significant

and growing portion of the private sector. A key question is how information

can be used to make better plans and decisions in business, government, the

sciences, and even in personal matters. The pervasive role of information in

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CHAPTER 13

The Value of

Information

The race isn’t always to the fastest nor the battle to the strongest, but that is the

way you should bet.

DAMONRUNYAN

The Stock Market

and the Economy

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