25 April 2017
This memo reports a 12-month forecast for the seasonally
adjusted Wisconsin unemployment rate. In addition to point forecasts (the
expected future value of the unemployment rate), the memo also reports 50% and
80% forecast intervals (probable ranges for future values).
The unemployment rate in March 2017 was 3.4%, down significantly
from 2016.
The forecasts are summarized in Figure 1 and Table 1. The
point forecast is for the unemployment rate to fall to 2.9% by August, stay
steady through December, and then increase to 3.1% by March 2018. The 80%
forecast intervals show that there is considerable additional uncertainty.
There is a possibility that the unemployment rate could moderately decrease. It
is also possible that the unemployment rate could substantially decrease, to 2.5%
by October 2017. The 50% forecast intervals refine this uncertainty, showing
that it is unlikely the unemployment rate will decrease below 2.6% over the
next year, or increase over the current 3.4%. Overall, the forecast is for the
unemployment rate to decrease, potentially substantially.
A 50% forecast interval is designed to contain the future
unemployment rate with 50% probability. It is just as likely for the rate to
fall in this interval as out of it. This is the smallest possible interval
which has even odds of containing the future rate. We can think of this
interval as “likely” to contain the future rate.
An 80% forecast interval is designed to contain the future
unemployment rate with 80% probability. We can think of this interval as
“highly likely” to contain the future rate. The 80% interval is designed so
that there is a 10% chance that the future value will be smaller than the
forecast interval, and a 10% chance that the future value will be larger than
the forecast interval.
To understand the economic reason behind these forecasts, the
econometric model finds the following salient features. The state unemployment
rate is below its long-term average. Mean reversion predicts a short-term
slight decrease of 0.20 followed by an increase of about 0.35. Similarly, the
U.S. national unemployment rate is low, accounting for an increase of about 0.20
over the upcoming year. The spread of low-grade corporate bond yields over
investment grade is lower than average, accounting for a predicted decrease of
about 0.3. Housing starts are below
their long-term average, accounting for a predicted decrease of 0.6. Building
permits are also below their long-term average, accounting for an increase of
about 0.4 over the upcoming year. The other variables contribute only small
effects to the forecast. Together, most of these effects offset with the net
effect of a short-term decrease followed by a modest increase.
Figure 1: Wisconsin Unemployment Rate Forecasts
TABLE 1: Wisconsin
Unemployment Rate Forecasts
|
History |
Point Forecast |
50% Interval Forecast |
80% Interval Forecast |
2017:1 |
3.9% |
|
|
|
2017:2 |
3.7% |
|
|
|
2017:3 |
3.4% |
|
|
|
2017:4 |
|
3.2% |
(3.2%, 3.2%) |
(3.2%, 3.3%) |
2017:5 |
|
3.1% |
(3.0%, 3.1%) |
(3.0%, 3.2%) |
2017:6 |
|
3.0% |
(2.9%, 3.1%) |
(2.8%, 3.1%) |
2017:7 |
|
2.9% |
(2.8%, 3.0%) |
(2.7%, 3.1%) |
2017:8 |
|
2.9% |
(2.8%, 3.0%) |
(2.6%, 3.1%) |
2017:9 |
|
2.9% |
(2.7%, 3.0%) |
(2.6%, 3.2%) |
2017:10 |
|
2.9% |
(2.7%, 3.0%) |
(2.5%, 3.2%) |
2017:11 |
|
2.9% |
(2.6%, 3.0%) |
(2.5%, 3.3%) |
2017:12 |
|
2.9% |
(2.7%, 3.1%) |
(2.5%, 3.4%) |
2018:1 |
|
3.0% |
(2.7%, 3.2%) |
(2.6%, 3.5%) |
2018:2 |
|
3.0% |
(2.8%, 3.3%) |
(2.6%, 3.6%) |
2018:3 |
|
3.1% |
(2.8%, 3.4%) |
(2.5%, 3.8%) |
Previous Forecasts