DP12722 Firms' Expectations of New Orders, Employment, Costs and Prices: Evidence from Micro Data
Firms' expectations play a central role in forward-looking macroeconomic models, but little is known empirically about how these are formed or whether they matter. Using a novel panel data set of firms' expectations about new orders, employment, unit costs, prices and wage rates for the United Kingdom, we document a range of stylized facts about the properties of firms' expectations and their relationship with recent pricing decisions. Expected future price and wage growth are influenced by firm-specific and aggregate factors. Price expectations are more correlated with cost and inflation indicators, wage expectations are more correlated with activity indicators. Expectations of new orders are
influenced by aggregate conditions, while expected employment and unit costs seem to be influenced more by firm-specific factors. We also provide micro evidence to support the idea that actual price movements are influenced by expected future price movements, although firms' expectations do not seem to be fully rational.