The sum of the weights must be equal to one, and more recent periods are weighted more heavily than those that precede them. Exponential smoothing is a form of weighted moving average in which the new forecast is a weighted sum of the actual observed sales or other variable in the current period and the weighted forecast of that variable for the period. It therefore implicitly incorporates all of the data used to create the previous forecasts, but is much easier to compute. The major advantage of the moving average method is that it is easy to use, quick, and inexpensive. The major disadvantage is that it does not react well to variations that occur for reasons such as cycles and seasonal effects.
Indicators also are important in forecasting.
Three types of indicators have been used for many years to help forecast the national economy. They are the Leading, Coincident, and Lagging indicator series. The terms refer to the nature of their relationship to the business cycle. As no single indicator series can encompass the economy's diverse activity, it is necessary to track many different series to determine the direction of the economy. These indexes are reported by the BEA every month in the Survey of Current Business.