A trend is the general direction in which something tends to move.
Trend analysis involves the collection and presentation of information in order to identify patterns.
Trend data is usually presented as a set of data points measured over uniformly-spaced, successive time periods.
A trend will be evident where the data shows a general tendency to move in the same direction over time. By drawing a line through the historical data to highlight the trend and extending that line over future observation points, you get a sense of where the subsequent observations should be if the trend is maintained and there is no change.
A trend line does not necessarily need to be straight - exponential growth or decline is sometimes observed.
Figure 3 shows a difference between the trend line and the new data point - this indicates that something has affected the behaviour.
To understand historical trends, the more observations you have, the easier it will be to identify patterns. A longer time frame can often help to identify less obvious patterns, such as those presented in seasonal data.
In the tax world, collecting reliable data over a longer period is problematic because it introduces a range of other variables that can affect the observations, particularly when dealing with annual tax data.
These variables include:
- changes in the way the data is collected
- differences in the timing of the intervals between data collection
- changes in the law
- changes in the way we administer the law
- economic turbulence
- societal changes.
While it is preferable to have enough observations to make the claim of a trend valid and reliable, having less does not rule out the indicator as a useful contributor to the overall suite of indicators - it can still add valuable insight and support for other indicators.