When top-down, bottom up-preferred, tricky

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Hi everyone,
Just a quick question here, would appreciate some input from all you smart people here
The Economic Analysis book (reading 16 equity market valuation), P144, it says that:
- If companies react slowly to changes in economic conditions, top-down forecasting is preferred
And…
- If the economy is on the brink of a change, bottom-up is preferred
Can someone please explain the logic here? Thanks a lot.

 

[MrSmart]

Top down approach is better heading into a recession, and bottom-up is better heading into an economic boom.
This is what it means pretty much.

 

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For the second one:
- If the economy is on the brink of a change, bottom-up is preferred
I’m thinking, the economy is on a brink of a change meaning upturn or downturn, in which case it is better to forecast company prospects based on their products = bottom-up

 

[MrSmart]

Companies are quick to react to business pickup by stocking up on inventory at lower costs, and are slow to cut inventory on slower business prospects.
Top-down is the more realistic approach to both, bottom-up is biased towards booming activity in perpetuity, reality is irrational sharp booms and busts. Therefore, top-down for predicting recessions is better than bottom up, botttom up is better for predicting upturns.

 

[Analyst mamba]

Bottom Up - Pro: quicker at detecting cyclical turns in the economy because they have the availabilty of production/inventory data. Con: Managerial optimism/emotional input of firm’s future
Top Down - Pro: smoother forecasts with less noise from volatility. Con: slower at detecting cyclical turns because relies on econometric and gathered data

 

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Thanks to everyone for their help