# Wisconsin Unemployment Rate Forecast

## University of Wisconsin

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%)

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