It was a $250-million business built around a process that only the computer age could have spawned: mathematically manipulating hundreds of statistics to produce forecasts of the future course of the economy. Who could have known that the computer would almost destroy the business, too?
Produced by three major firms, computer-generated projections of interest rates, inflation, housing starts, and hundreds of other important indicators became a fixture of corporate board rooms and cabinet offices throughout the 1970s. Private and government clients paid as much as $150,000 a year for the services of the big forecasting firms, which were growing at rates of up to 40% a year.
No longer. The econometric forecasting business is in the midst of change so radical and swift that some of its most prominent practitioners already may be threatened financially.
The seers have been critically affected by developments for which their own mathematical models failed to account. One was the advent of the personal computer, which cut sharply into the firms' crucial revenues from computer time-sharing. The second was the economy's penchant for confounding any attempt to view it coherently. Of the three major forecasting firms, one, Data Resources Inc., has been been split up and strewn in components around its parent company, McGraw-Hill Inc.; its profits have slid by more than 40% in two years, to $6 million in 1984 from $8.5 million in 1983 and $10.9 million in 1982.
Firm Up for Sale
The second-largest, Chase Econometrics, is for sale by its owner, Chase Manhattan Corp. One potential buyer was McGraw-Hill, which relished the smaller company's client contacts and expertise in some specialized areas. Talks between Chase and McGraw-Hill have broken off, however.
The third firm, Wharton Econometric Forecasting Associates, founded as a nonprofit company in 1963, has maintained its record of red ink despite its sale in 1980 to a profit-oriented company, Ziff-Davis Publishing Co. Ziff sold the firm in 1983 to a computer firm owned by the French government, which is now looking for international partners willing to put up equity capital to help the firm grow, particularly in Europe and the Far East.
At their peak in the early 1980s, these three firms split as much as $170 million in annual revenues, insiders say. Yet they now face pressure to slash prices while confronting competition from much smaller firms that offer statistical databases at a cut rate from what the big firms once charged.
"In the last three years, there's been hellacious competitive pricing," says one former Data Resources economist now at a private corporation.
In retrospect, 1982 appears to be something of a watershed year for the major firms. It was a recession year, and many clients closely examined their consulting expenditures. As it happens, the big firms had done so poorly in forecasting that recession that many clients found their services expendable.
Affected by Computer
Simultaneously, the personal computer vogue took off, establishing the powerful desk-top machine as a competitor to the huge mainframe computers operated by the forecasters.
That is important because for Data Resources and Chase, the actual economic projections sold to clients were attractions for clients but money-losing propositions for the forecasters; the companies were really selling computer time. At Data Resources, time-sharing fees could come to as much as two-thirds of a client's bill, and accounted for most of Data Resources' profit. At Chase, the share of revenues was more than 40%. At Wharton, the smallest of the big three and the one most oriented toward research, the share was about 10%.
The personal computer allows individual users to do at their desks many of the myriad computations once executed by the big firms' full-sized mainframes. Income from time-sharing, now only necessary for the most complex computations, accordingly has been steadily shrinking.
"In the 1970s, you would have hundreds of companies spending hundreds of thousands of dollars per year to hook on to these mainframes, just to plot the consumer price index," says Donald Straszheim, who recently resigned as chief economist at Wharton to join Merrill Lynch Economics. "They were not doing sophisticated analysis, just massaging the numbers. Now the PC software allows people to manipulate data till hell freezes over--at essentially no marginal cost except electricity and a person's time."
Slide in Profits
The upshot was a slide in profits. After topping out at nearly $11 million in 1982, Data Resources' pretax earnings dropped to about $6 million last year, according to analysts' estimates. Time-sharing accounted for less than half of Data Resources' revenues in 1984.